GALOOB LEWIS TOYS INC /DE/, S-1/A, 1996-03-14

GALOOB LEWIS TOYS INC /DE/
S-1/A, 1996-03-14
GAMES, TOYS & CHILDREN'S VEHICLES (NO DOLLS & BICYCLES)

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As filed with the Securities and Exchange Commission on March 14, 1996

Registration No. 333-00743
===============================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

AMENDMENT NO. 1
TO

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
LEWIS GALOOB TOYS, INC.
(Exact name of registrant as specified in its charter)
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<CAPTION>
<S> <C> <C>
DELAWARE 5040 94-1716574
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or organization) classification code number) identification no.)
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500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(415) 952-1678
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
----------------
MARK D. GOLDMAN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
LEWIS GALOOB TOYS, INC.
500 FORBES BOULEVARD
SOUTH SAN FRANCISCO, CALIFORNIA 94080
(415) 952-1678
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

Copies to:
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<S> <C>
WILLIAM G. CATRON, ESQ. AND CHARLES I. WEISSMAN, ESQ.
LEWIS GALOOB TOYS, INC. SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
500 FORBES BOULEVARD 919 THIRD AVENUE
SOUTH SAN FRANCISCO, CALIFORNIA 94080 NEW YORK, NEW YORK 10022
(415) 952-1678 (212) 758-9500
</TABLE>
----------------

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.
o ------------------

If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier registration
statement for the same offering. o __________________

If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. o

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CALCULATION OF REGISTRATION FEE
=============================================================================================================================
TITLE OF EACH CLASS OF PROPOSED PROPOSED MAXIMUM
SECURITIES AMOUNT TO MAXIMUM OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED BE REGISTERED (1) PER SECURITY (2) OFFERING PRICE (1) REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value 269,976 shares $16.00 $4,319,616 $1,489.22
=============================================================================================================================
</TABLE>

(1) A total of 1,684,398 shares of Common Stock are being registered pursuant to
this Registration Statement. A registration fee of $6,310.03 with respect to
1,414,422 shares of Common Stock was paid on February 6, 1996, based on a
proposed maximum offering price per share of $12.9375.

(2) Estimated solely for purposes of calculating the registration fee. Pursuant
to Rule 457(c), equals the average of the high and low sales prices of the
Common Stock on the New York Stock Exchange on March 8, 1996.

----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.

<PAGE>

LEWIS GALOOB TOYS, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K

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<CAPTION>
FORM S-1 ITEM NUMBER AND HEADING CAPTION OR LOCATION IN PROSPECTUS
-------------------------------- ---------------------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus Cross-Reference Sheet; Outside Front
Cover Page of Prospectus

2. Inside Front and Outside Back Cover Pages Inside Front Cover Page and Outside Back
of Prospectus Cover Page of Prospectus

3. Summary Information, Risk Factors and Prospectus Summary; Risk Factors; Not
Ratio of Earnings to Fixed Charges Applicable

4. Use of Proceeds Prospectus Summary; Use of Proceeds

5. Determination of Offering Price Not Applicable

6. Dilution Not Applicable

7. Selling Security Holders Outside Front Cover Page; Selling
Stockholders

8. Plan of Distribution Outside Front Cover Page; Plan of
Distribution

9. Description of Securities to be Registered Outside Front Cover Page; Prospectus
Summary; Dividends; Price Range of
Common Stock; Description of Capital
Stock

10. Interests of Named Experts and Counsel Legal Matters; Experts

11. Information with Respect to the Registrant Outside Front Cover Page; Prospectus
Summary; Risk Factors; Dividends; Price
Range of Common Stock; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Executive Compensation; Principal
Stockholders; Certain Transactions;
Description of Capital Stock; Index to
Financial Statements

12. Disclosure of Commission Position on Not Applicable
Indemnification for Securities Act
Liabilities

</TABLE>

<PAGE>

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED MARCH 14, 1996

PROSPECTUS

LEWIS GALOOB TOYS, INC.

1,684,398 SHARES OF COMMON STOCK

This Prospectus relates to an offering (the "Offering") by certain
stockholders (the "Selling Stockholders") of an aggregate of up to 1,684,398
shares of common stock, $.01 par value per share (the "Common Stock"), of Lewis
Galoob Toys, Inc. (the "Company"), of which (i) 1,511,871 shares of Common Stock
are issuable upon the conversion of $14,000,000 aggregate principal amount of
the Company's 8% Convertible Subordinated Debentures due 2000 (the "Debentures")
and (ii) an aggregate of 172,527 shares of Common Stock are issuable upon
exercise of outstanding warrants (the "Warrants"). All of the Common Stock
offered hereby will be sold for the accounts of the Selling Stockholders, and
the Company will not receive any proceeds from the Offering, other than the
proceeds from the exercise of the Warrants by the Selling Stockholders. All of
the shares of Common Stock offered hereby may be sold in the open market, in
privately negotiated transactions or otherwise by the holders thereof. See
"Selling Stockholders."

The Common Stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "GAL." On March 8, 1996, the closing price per share of
Common Stock, as reported by the NYSE, was $16.25.

The Selling Stockholders directly, through agents designated
from time to time or through dealers or underwriters also to be designated, may
sell the Common Stock offered for sale hereby from time to time on terms to be
determined at the time of sale. To the extent required, the purchase price, the
public offering price, the names of any such agents, dealers or underwriters and
any applicable commissions or discount with respect to a particular offer will
be set forth in an accompanying Prospectus supplement.

The Selling Stockholders and any broker-dealers, agents or
underwriters that participate with the Selling Stockholders in the distribution
of the Securities may be deemed to be "Underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), and any commissions
received by them and any profit on the resale of the shares of Common Stock
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Plan of Distribution" for certain indemnification
arrangements.

AN INVESTMENT IN THE SECURITIES OFFERED HEREBY INVOLVES CERTAIN RISKS.
SEE "RISK FACTORS" LOCATED AT PAGES 7-11 OF THIS PROSPECTUS.

-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.

The date of this Prospectus is __________ __, 1996

<PAGE>

PROSPECTUS SUMMARY

The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus. Each prospective investor is urged to read this Prospectus in its
entirety and should carefully consider the matters set forth in "Risk Factors."

THE COMPANY

Lewis Galoob Toys, Inc. (the "Company") designs, develops,
markets and sells high quality toys worldwide and has been engaged in the toy
business since 1957. The Company's strategies in selecting and developing
product lines are to focus primarily on low to medium priced extendable product
lines that are brandable, to capitalize on current trends in the toy industry
and popular culture and to expand and diversify its product categories.
Consistent with these strategies, the types of products which have produced the
preponderance of the Company's revenues have changed significantly. This product
change evolved both by developing and procuring new toys which are based on
original ideas and by seeking to obtain and develop new entertainment licenses.

The Company's products are generally sold worldwide, with a
substantial portion of its revenues derived from sales in the United States and
Europe. The Company sells its products principally to retailers in the United
States and to toy distributors outside of the United States. U.S. retail outlets
for the products include specialty toy retailers, discount and chain stores,
catalog and mail order companies, department stores and variety stores. See
"Business-Distribution and Sales." The Company's products are generally
manufactured overseas, primarily in the People's Republic of China ("China").

The Company's results are dependent, in large part, on
management's experience in the toy industry and its ability to identify and
capitalize on current trends and market new products based on such trends in a
timely and efficient manner. As a result of changing consumer tastes, individual
toys usually have relatively short product lives. Consequently, an increase or
decrease in popularity of a particular item during any year could have a
material impact on revenues and profit for that year.

The Company has historically marketed a variety of toy
products designed for children of both sexes and of different age groups. In
recent years, the Company's main emphasis has been to revive, develop, extend
and expand its core brand, Micro Machines(R), and to diversify the balance of
its other product lines by building other multi-year thematic brands. See
"Business-Licensing and Related Rights; Trademarks."

Consistent with the extendable product life strategy, the
Company's Micro Machines product line, first introduced in 1987, has generated
significant sales for a much longer product life than most toy products, and the
Company believes that the product line will continue to generate significant
sales in the immediate future. Micro Machines sales represented 44% of the
Company's total revenues in 1995, 51% in 1994 and 41% in 1993. Continuing demand
for this product line was strong and shipments for certain new 1996 product
lines commenced in the fourth quarter of 1995. While the Micro Machines product
line has generated continuing sales for an extended period of time, there can be
no assurance that the demand for Micro Machines products will continue at
current or previous levels.

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PRODUCT LINE

The Company's 1996 product offering consists of four girls'
lines,including continuations and extensions of the Sky Dancers(R), My Pretty
DollHouse(TM) and Happy Ness(TM) lines, and also the new Pound Puppies(R) line;
and five boys' lines, including continuations and extensions of the Micro
Machines and Biker Mice From Mars(R) lines, and also the new Dragon Flyz(TM),
The Real Adventures of Jonny Quest(TM) and UltraForce(TM) lines.

In the girls' product area, the highly successful Sky Dancers
flying doll and accessory line has been extended to include new segments,
including Pretty Lights(R) with light-up flying dolls and launchers;
smaller-size Fairy Flyers(TM) flying dolls, pets and Magical Flying Carousel(TM)
playset; Fairy Tale Couples(TM); and the Flying Princess(TM) doll with graceful
fluttering wings. The My Pretty DollHouse line has been extended with Enchanted
Castles(TM) as well as new basic house and accessory styles. The Happy Ness line
includes play figures and playsets. The Company has also reintroduced a
small-scale version of Pound Puppies and Pound Pur-r-ries(R), the most
successful plush toy lines of the 1980's.

In the boys' product area, the Micro Machines line of
miniature vehicles, playsets and accessories now includes a new, larger Action
Fleet(TM) scale of Star Wars(R) articulated action figures, vehicles and
playsets, as well as the continuations and extensions of other successful Star
Wars vehicles, figures and playsets in the traditional Micro Machines scale.
Other Micro Machines licensed properties include Star Trek(R), Babylon 5(TM),
Aliens(TM), James Bond 007(TM), Indiana Jones(TM) and Predator(TM). A new
segment, Exploration, features the first Micro Machines that float in water.
Finally, three innovative new Double Takes(TM) playsets have been added--two in
the Basic segments and one in the Military segment. These transforming playsets
feature two action play environments in one toy.

The male action figure product area features three new lines,
as well as the continuation of the Biker Mice From Mars line in the
international marketplace. Dragon Flyz is an assortment of fully articulated
flying warriors with dragon-styled launchers. The Real Adventures of Jonny Quest
is based on the updated reintroduction of the classic 1960's animated television
property from Hanna-Barbera Cartoons and Turner Home Entertainment, featuring
both real-world and futuristic, virtual-reality QuestWorld(TM) figures and
vehicles. The UltraForce line of super heroes and villains is based on the
successful comic book series and animated television show.

The Company's 1995 product line consisted of continuations and
extensions of the Micro Machines line and introductions of several new product
lines, including a new extendable girls' brand, Sky Dancers dolls.

The Micro Machines line included the continuing licensed
vehicles based on the popular Star Wars motion picture trilogy. The Company had
also added Star Wars playsets depicting scenes from the movies and including
action features, figures and vehicles. Other licensed products included vehicles
and figures from the Power Rangers(TM) television series and the James Bond 007
motion picture. There were also new vehicles from the Star Trek and Babylon 5
television series. To extend the Micro Machines segment of military vehicles and
troops, new playsets included Night Attack!(TM), with its battery-powered
searchlight and multi-missile launcher, as well as FalconWing Skybase(TM) and
Orion J-22(TM) Submarine Base transforming playsets. Also under the Micro
Machines brand was Z-Bots(R), a line of collectible robot figures, vehicles and
playsets.
3

<PAGE>

The new and innovative Sky Dancers line of dolls and playsets
featured the first known girls' doll that flies. These collectible ballerina
dolls fly utilizing a special launcher with pull-cord action created in various
themes. The playsets included Magic Rolling Launchers in the shape of a swan and
pegasus.

The Company's new My Pretty Follhouse line was based on a
classic girls' toys play pattern that incorporated the successful concepts of
miniaturization and collectibility. This product line consisted of modular,
finely-decorated miniature dollhouses that came with dolls and other surprise
accessories. also available were coordinated designer Furniture Packs, Back and
Front Yard Sets, and snap-on 2nd Story Additions to expand the houses into even
bigger mansions.

Also introduced was UltraForce, a licensed male action line of
dramatic super heroes and villains, vehicles and accessories, based on the
Malibu(tm) (Marvel) Comics(tm) strips and the new syndicated animated television
series that premiered in October 1995.

RECENT DEVELOPMENTS

On February 12, 1996, the Company announced that it was
calling the Debentures for redemption (the "Redemption") and commencing an
exchange offer (the "Exchange Offer") for its Depositary Convertible
Exchangeable Preferred Shares (the "Preferred Shares").

Under the terms of the Redemption, the Debentures now
outstanding will be redeemed on or about March 22, 1996, unless converted into
Common Stock by holders prior to March 15, 1996. Until March 15, 1996, the
Debentures are convertible into an aggregate of 1,511,871 shares of Common Stock
at the rate of $9.26 principal amount for each share of Common Stock. The
Company became entitled to redeem the Debentures when the average closing price
of the Common Stock for twenty consecutive days exceeded $13.89, 150% of the
conversion price.

On February 28, 1996, the Company commenced the Exchange Offer
for the 1,839,500 Preferred Shares currently outstanding, offering to exchange
1.85 shares of Common Stock for each outstanding Preferred Share. The Exchange
Offer is conditioned on, among other things, the receipt of valid tenders from
the holders of at least 75% of the outstanding Preferred Shares. The Exchange
Offer will expire on March 29, 1996, unless extended by the Company in
accordance with its terms.

GENERAL

The Company was incorporated under the laws of the State of
California in 1968. The Company was reincorporated in the State of Delaware in
1987. The Company's principal executive offices are located at 500 Forbes
Boulevard, South San Francisco, California 94080 and its telephone number is
(415) 952-1678.
4

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THE OFFERING

Common Stock Outstanding as of March 1, 1996(1) ...... 10,101,241 shares
Common Stock Offered by the Company .................. None
Common Stock Offered by the Selling Stockholders ..... 1,684,398 shares
Common Stock Outstanding after the Offering(2) ....... 11,785,639 shares
NYSE Symbol for the Common Stock ..................... GAL

(1) Excludes (i) 1,341,592 shares of Common Stock reserved for issuance upon
exercise of outstanding stock options, none of which are being offered
hereby, (ii) 1,511,871 shares of Common Stock reserved for issuance upon
conversion of the Debentures, all of which are being offered by the Selling
Stockholders herein, (iii) 567,866 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants, including 172,527 shares of
Common Stock being offered by the Selling Stockholders herein, and (iv)
2,180,148 shares of Common Stock reserved for issuance upon conversion of
the Company's outstanding Preferred Shares, each representing 1/10th of a
share of the Company's $17.00 Convertible Exchangeable Preferred Stock
("$17.00 Preferred Stock"). See "Capitalization," "Executive Compensation"
and "Description of Capital Stock."

(2) Based on Common Stock outstanding as of March 1, 1996. Excludes (i)
1,341,592 shares of Common Stock reserved for issuance upon exercise of
outstanding stock options, (ii) 395,339 shares of Common Stock reserved for
issuance upon exercise of outstanding warrants not being offered hereby and
(iii) 2,180,148 shares of Common Stock reserved for issuance upon
conversion of the $17.00 Preferred Stock.

<PAGE>

SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The information set forth below should be read in conjunction
with "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus.

YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
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STATEMENTS OF OPERATIONS DATA:

Net revenues........................ $220,044 $178,792 $134,334 $166,280 $150,636
======== ======== ======== ======== ========

Net earnings (loss)................. 9,399 18,424 (10,924) (2,447) (7,540)
Preferred stock dividends:
Paid.............................. - - - 782 3,127
In arrears........................ 3,127 3,127 3,127 2,345 -
----- ---------- --------- -------- ---------

Net earnings (loss) applicable to
common shares.................... $ 6,272 $15,297 $ (14,051) $ (5,574) $(10,667)
======= ======== ========== =========== =========

Net earnings (loss) per common share:
Primary........................... $ 0.60 $ 1.51 $ (1.47) $ (0.59) $ (1.14)
========= ======== ========= ========== ==========
Fully diluted..................... $ 0.60 $ 1.41 $ (1.47) $ (0.59) $ (1.14)
========= ======== ========= ========== ==========

Number of common shares
and common shares
equivalents outstanding-average 10,451 10,111 9,548 9,400 9,325

AT DECEMBER 31,
--------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
BALANCE SHEET DATA:

Working capital..................... $ 54,670 $ 53,219 $ 30,813 $ 27,070 $ 29,127
Total assets........................ 120,084 100,766 71,005 71,604 64,016
Long-term debt...................... 14,000 18,414 18,608 4,944 5,244
Shareholders' equity................ 54,172 44,768 22,162 32,246 35,092
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RISK FACTORS

In addition to other information in this Prospectus, the
following risk factors should be considered carefully in evaluating the Company
and its business before purchasing the shares of Common Stock offered hereby.

HISTORICAL NET LOSSES

The Company has sustained a net loss of $32.4 million, $10.7
million, $5.6 million, and $14.1 million for fiscal years 1990, 1991, 1992 and
1993, respectively. The loss in 1990 is largely attributable to the 44% decline
in sales from 1989, primarily in the Micro Machines toy line. In 1991 through
1993, the Company put in place a new management team that strategically
restructured the product lines resulting in a return to profitability as planned
in 1994 and 1995. See "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
financial statements of the Company (and related notes thereto) included
elsewhere in this document.

CONSUMER PREFERENCES

The toy industry is affected by changing consumer preferences,
resulting in many products in the toy industry being successfully marketed only
for a limited period of time (often one year or less). The toy industry is also
affected by shifting cultural and demographic trends and general economic
conditions. Consequently, the Company's results are dependent, in large part, on
management's experience in the toy industry and its ability to identify and
capitalize on current trends and market new products in a timely and efficient
manner. The Company may not always be able to respond quickly to changes in
consumer preferences, and such inability could have an adverse impact on the
Company. See "Business."

DEPENDENCE ON SINGLE PRODUCT CATEGORY

Historically, a relatively small number of items have
contributed a large portion of the Company's revenues in each year.
Consequently, a decrease in popularity of a particular item during any year
could have a material adverse impact on revenues and profit for that year. The
Micro Machines line of collectible, miniature vehicles and accessories accounted
for 44%, 51% and 41% of the Company's net revenues for the years 1995, 1994 and
1993, respectively. Continuing demand for this product line was strong and
shipments for certain new 1996 product lines commenced in the fourth quarter of
1995. While the Micro Machines line has generated continuing sales for an
extended period of time, there can be no assurance that the demand for Micro
Machines products will continue at current or previous levels. See "Business."

SEASONALITY

Because of heavy consumer demand for toy products during the
Christmas season, the toy industry is highly seasonal in nature. Consistent with
the fact that a disproportionate share of receivables is created late in the
year and consistent with U.S. toy industry practices, receivables from a
significant portion of domestic sales are not collected until the final weeks of
the fourth quarter and the first quarter of the succeeding year, which creates a
substantial demand for working capital on a seasonal basis. The results of
operations for any quarter are subject to a number of variables and may not
reflect the results of operations for the year. Similarly, any comparisons
between fiscal periods of successive years may not be indicative of the results
of operations for a full year. Orders in the U.S. toy industry are generally
cancelable until

<PAGE>

shipped. Therefore, the Company believes that backlog may not be an accurate
indicator of the Company's future sales. See "Business--Seasonality and
Backlog."

FOREIGN OPERATIONS

Nearly all of the Company's products are manufactured to its
specifications by nonaffiliated parties located in China and, to a lesser
extent, other foreign locations. Therefore, the Company could be affected by
political or economic disruptions affecting business in such countries. The
Company does not carry insurance for political or economic unrest or disruptions
for several reasons, including, but not limited to, costs of such insurance and
the limited insurance coverage available. The impact on the Company from such
unrest or disruptions would depend on general factors, including, but not
limited to, the nature, extent and location of such unrest or disruptions and
the Company's ability to: (1) procure alternative manufacturing sources outside
of the country involved; (2) retrieve its tooling; (3) relocate its production
in sufficient time to meet demand; and (4) pass cost increases likely to be
incurred resultant to (1) - (3) above through to the Company's customers as
product price increases. The political unrest in 1989 in China had an
insignificant impact on the manufacturing and shipping of the Company's
products. There can be no assurance that in the future the Company will not be
adversely affected by political or economic disruptions in China or other
foreign locations. In addition, changes in the relationship between the United
States dollar and the Hong Kong dollar may have an impact on the cost of goods
purchased from manufacturers. Further, changes in tariffs could have an adverse
effect on the cost of goods imported from the Orient.

The Company's products are principally produced in China,
which currently is designated with Most Favored Nations ("MFN") status by the
United States. This designation allows products imported into the United States
from China to be accorded the most favorable import duties. In late 1994,
Congress approved the GATT (Uruguay round), which allows imports into the United
States of toy merchandise with unconditional duty-free entry from any nation
with MFN status. Generally, the trade negotiations between China and the United
States have been difficult, but both sides have shown their willingness to
resolve trade disputes and avoid punitive sanctions, which could result in the
United States imposing higher duties on selective Chinese-made products imported
into the United States (these sanctions would be put in place through Section
301 of the Trade Act of 1974, as amended). In the past, Section 301 sanctions
proposed by the United States did not include sanctions or punitive damages
against toy imports from China. As such, the Company would be unaffected. The
loss of MFN status for China, however, would result in a substantial increase in
duty for the Company's products produced in China and imported into the United
States. This increase in duty would be large enough that it could materially
affect the Company's business. Products shipped from China to other countries
should not be affected. Other toy companies also source product from China and
would be affected to similar degrees. However, the impact on the Company from
any significant change in duties on its Chinese-produced products would depend
on several factors including, but not limited to, the Company's ability to (1)
procure alternative manufacturing sources outside of China, (2) retrieve its
tooling located in China, (3) relocate its production in sufficient time to meet
demand and (4) pass cost increases likely to be incurred resultant from (1) -
(3) above through to the Company's customers as product price increases. See
"Business-Manufacturing."

In 1994, certain quotas on Chinese-produced toy products were
introduced in the European Economic Community. The quotas did not have a
material impact on the Company's business in 1995 and are not expected to have a
material impact on the Company's business in the foreseeable future.

<PAGE>

COMPETITION

The toy industry is highly competitive. The Company competes
with several larger domestic and foreign toy companies, such as Hasbro, Mattel,
Tyco, Bandai and Playmates, and many smaller companies in the design and
development of new toys, the procurement of licenses, the improvement and
expansion of previously introduced products and product lines and the marketing
and distribution of its products. Some of these companies have longer operating
histories, broader product lines and greater financial resources and advertising
budgets than the Company. In addition, it is common in the toy industry for
companies to market products which are similar to products being successfully
marketed by competitors. The Company believes that the strength of its
management team, the quality of its products, its relationships with inventors,
designers and licensors, its distribution channels, and its overhead and
operational controls allow the Company to compete effectively in the
marketplace. See "Business--Competition."

DEPENDENCE ON KEY PERSONS

The success of the Company may depend to a significant degree
upon the services of Mark D. Goldman, President and Chief Executive Officer of
the Company. The Company maintains a key man life insurance policy on Mr.Goldman
in the amount of $2,000,000. In addition, the loss
of the services of senior management and the inability to attract replacements
of these key personnel could have a material adverse effect on the Company. See
"Management."

POTENTIAL PRODUCT LIABILITY

The Company is engaged in a business which could result in
possible claims for injury resulting from the failure of its products. To date,
the Company has not been named as a defendant in any product liability lawsuit.
While the Company currently maintains product liability insurance, there can be
no assurance that it will be able to maintain such insurance on acceptable terms
or that any such insurance will provide adequate protection against potential
liabilities. A successful claim brought against the Company resulting in a final
judgment in excess of its insurance coverage could have a material adverse
effect on the Company. See "Business--Government Regulations."

RELIANCE ON MAJOR CUSTOMERS

The Company markets and sells its products throughout the
world. Sales to customers in the United States accounted for on a consolidated
basis approximately 63%, 66% and 66% of net sales in 1995, 1994 and 1993,
respectively. In 1995 and 1994, Toys "R" Us, Inc. accounted for approximately
20% and 21% of the Company's consolidated net sales, respectively. Wal-Mart
accounted for approximately 11% of net sales in 1995. Any decision by Toys "R"
Us or Wal-Mart to substantially reduce or cease its purchases from the Company
would have a material adverse effect on the Company's business. See
"Business--Distribution and Sales."

GOVERNMENT REGULATIONS

The Company is subject to the provisions of, among other laws,
the Federal Hazardous Substances Act and the Federal Consumer Product Safety
Act. Those laws empower the Consumer Product Safety Commission (the "CPSC") to
protect consumers from hazardous toys and other articles. The CPSC has the
authority to exclude from the market articles which are found to be hazardous
and can require a manufacturer to recall such products under certain
circumstances. Similar laws exist in some states and cities in the United States
and in Canada and Europe. Products are also designed and tested to meet or
exceed ASTM F963, the Standard Consumer Safety Specification for Toy Safety. The
Company emphasizes

<PAGE>

the safety and reliability of its products and has established a strong quality
assurance and control program to meet the Company's objective of delivering high
quality, safe products. While the Company believes that it is in compliance in
all material respects with applicable laws, rules and regulations, there can be
no assurance that more restrictive laws, rules or regulations will not be
adopted in the future which could make compliance more difficult or expensive or
otherwise adversely affect the Company's business or prospects. See
"Business--Government Regulations."

LICENSING AND RELATED RIGHTS

The Company normally produces substantially all of its
products under licenses from other parties. Some of these licenses confer rights
to exploit original concepts developed by toy inventors and designers. Other
licenses, referred to as entertainment licenses, permit the Company to
manufacture and market toys based on characters or properties which develop
their own popular identity, often through exposure in various media such as
television programs, movies, cartoons and books. Normally most entertainment
licenses extend for one to three years and are typically renewable at the option
of the Company upon payment of certain minimum guaranteed payments or the
attainment of certain sales levels during the initial term of the license.
Licenses for original ideas typically extend for the commercial life of the
product. The Company pays royalties to its licensors which typically range from
2% to 14% of net sales. As a result of increased competition among toy companies
for licenses, in certain instances the Company has paid, and may in the future
be required to pay, higher royalties and higher minimum guaranteed payments in
order to obtain attractive properties for the development of product lines. See
"Business--Licensing and Related Rights; Trademarks."

The Company is an active participant in the market for
entertainment licenses and has obtained domestic and international license
rights for most of its products. A determination to acquire an entertainment
license must frequently be made before the commercial introduction of the
property in which a licensed character or property appears, and license
arrangements often require the payment of non-refundable advances or guaranteed
minimum royalties. Accordingly, the success of an entertainment licensing
program is dependent upon the ability of management to assess accurately the
future success and popularity of the properties which it is evaluating, to bid
for products on a selective basis in accordance with such evaluation, and to
capitalize on the properties for which it has obtained licenses in an
expeditious manner. There can be no assurance that the Company will be able to
enter into entertainment licensing arrangements in the future for successful and
popular properties on terms acceptable to the Company.

TRADEMARKS AND PROPRIETARY TECHNOLOGY

Most of the Company's products are sold under trademarks and
certain products incorporate patented devices or designs. The Company
customarily seeks protection of its product patents and major product trademarks
in the United States and certain other countries. These trademarks, such as
Micro Machines, are significant assets of the Company. The Company believes that
the loss of certain of its license rights or trademarks for particular product
lines may have a material adverse effect on its business. However, the Company
believes its rights to these properties are adequately protected. See
"Business--Licensing and Related Rights; Trademarks."

ANTI-TAKEOVER PROVISIONS

The Company's Certificate of Incorporation ("Certificate") and
By-Laws ("By-Laws") contain, among other things, provisions establishing a
classified Board of Directors, authorizing shares of preferred stock with
respect to which the Board of Directors of the Company has the power to fix the
rights, preferences, privileges and restrictions without any further vote or
action by the stockholders, and requiring

<PAGE>

the vote of holders of 80% of the voting power of the Company in order to remove
directors, amend the ByLaws and approve certain business combinations with
"Related Persons." Such provisions may delay, deter or prevent a merger,
consolidation, tender offer, or other business combination or change of control
involving the Company that some or a majority of the Company's stockholders
might consider to be in their best interests, including offers or attempted
takeovers that might otherwise result in such stockholders receiving a premium
over the market price for the Common Stock. In addition, such provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company first to negotiate with the Company before making a bid for the
Common Stock at a premium over the market price of the Common Stock. Such
provisions may also adversely affect the market price of, and the voting and
other rights of the holders of, Common Stock. See "Description of Capital Stock
- -- Preferred Stock" and "Certain Provisions of the Company's Certificate of
Incorporation and By-Laws."

USE OF PROCEEDS

If all of the holders of the outstanding Warrants held for the
respective accounts of the Selling Stockholders named herein elect to exercise
their Warrants, the estimated net proceeds to the Company would be approximately
$1,483,556 (including expenses of the Offering estimated to be approximately
$40,000). The Company intends to apply the net proceeds, if any, received by the
Company from the exercise of the Warrants for working capital and general
corporate purposes. The Company will not receive any of the proceeds from this
Offering. All of the proceeds from this Offering will be received by the Selling
Stockholders.

DIVIDENDS

No cash dividends were declared in the last five years on the
Common Stock. The Board of Directors of the Company has no current plans to pay
cash dividends on the Common Stock. The Company's current credit agreement and
the terms of its $17.00 Preferred Stock limit the Company's ability to pay cash
dividends on the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity, Financial Resources
and Capital Expenditures" and "Description of Capital Stock--Preferred Stock."
In addition, future dividend policy will depend on the Company's earnings,
capital requirements, financial condition and other factors considered relevant
by the Board of Directors.

On June 10, 1992, the Company announced it would not pay the
July 1, 1992 $0.425 per share quarterly dividend on its Depositary Shares which
represent shares of the $17.00 Preferred Stock. The Company has not paid the
subsequent quarterly dividends. As of December 31, 1995, the dividend was
cumulatively fifteen quarters in arrears, representing a total dividend
arrearage of $11.7 million (or $6.375 per share). By the terms of the
Certificate of Designations for the $17.00 Preferred Stock, the Company is not
legally obligated to pay any such arrearage. Prior to the announcement of the
Exchange Offer, the Company had consistently maintained that it was not in its
best interest to reinstate the dividend until the Company had generated
consistent net income from operations and continuation of such profitability
could be reasonably expected. Prior to the announcement of the Exchange Offer,
based upon recent results, the Company had been evaluating its alternatives with
regard to the $17.00 Preferred Stock. See "Summary--Recent Developments." The
net earnings (loss) per share calculation includes a provision of the $17.00
Preferred Stock dividends in arrears. No Common Stock dividends may be paid
unless all $17.00 Preferred Stock dividend payments are current. As a result of
the cumulative dividend being six or more quarters in arrears, on July 15, 1994
the holders of the $17.00 Preferred Stock exercised their right to elect two
directors (Mr. Hoffer Kaback and Mr. George Riordan) to the Board of Directors
of the Company. See "Description of Capital Stock--Preferred Stock."

<PAGE>

PRICE RANGE OF COMMON STOCK

The Common Stock (NYSE symbol: GAL) is traded on the NYSE. The
following table sets forth the high and low closing sale prices for the Common
Stock, as reported by the NYSE, for each calendar quarter since January 1, 1993:

Fiscal Year High Low
- ----------- ---- ---
1996 First Quarter $17 1/4 $10 3/8
(through March 8, 1996)
1995 First Quarter $ 7 3/4 $ 5 1/4
Second Quarter 8 3/8 6
Third Quarter 9 1/2 6 1/2
Fourth Quarter 13 5/8 9 1/4

1994 First Quarter $ 10 5/8 $ 6 1/8
Second Quarter 6 7/8 5 1/2
Third Quarter 8 1/2 6 1/8
Fourth Quarter 7 3/8 4 3/4

1993 First Quarter $4 1/8 $ 3 1/8
Second Quarter 3 7/8 3 3/8
Third Quarter 3 3/4 2 1/2
Fourth Quarter 10 3/4 4 1/4

As of March 1, 1996, there were approximately 1,500 holders of record of
the Common Stock, excluding beneficial owners of shares registered in nominee or
street name.

<PAGE>

CAPITALIZATION

The following table sets forth the consolidated capitalization
of the Company at December 31, 1995, and as adjusted to give effect to the
issuance of 1,511,871 shares of Common Stock resulting from the conversion of
the Debentures, the exercise of the Warrants to purchase 172,527 shares of
Common Stock by the Selling Stockholders and the exchange and retirement of all
of the Preferred Shares pursuant to the Exchange Offer. See "Summary--Recent
Developments." The following table should be read in conjunction with the
consolidated financial statements of the Company and the notes related thereto
included elsewhere in this Prospectus. See also "Use of Proceeds," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Capital Stock."

<TABLE>
<CAPTION>
DECEMBER 31, 1995
ACTUAL ADJUSTED(1)(2)
----------------------
(IN THOUSANDS)
<S> <C> <C>
Short-term debt (including current portion
of long-term debt) (3)(4).................... $ 19,493 18,969
======= ======
8% Convertible Subordinated Debentures due 2000 14,000 0
------- --
Total long-term debt ........................ 14,000 0

Shareholders' equity:
Preferred Stock; 1,000,000 shares authorized;
183,950 and no shares of $17.00 Convertible
Exchangeable Preferred Stock of $200.00
liquidation value per share issued and
outstanding, actual and as adjusted ...... 36,790 0

Common Stock, $.01 par value; 50,000,000
shares authorized; 10,089,961 and
15,177,434 shares issued and outstanding,
actual and as adjusted (5) .............. 101 152
Additional paid-in capital .................. 31,579 104,755 (6)
Retained earnings (deficit) ................. (13,851) (35,764)(6)
Cumulative translation adjustment ........... (447) (447)
------------ -----
Total shareholders' equity .................. 54,172 68,696
----------- ------
Total capitalization ........................ $ 87,665 $ 87,665
======= =======
</TABLE>

- ---------------
(1) Assumes (i) the conversion of the Debentures into 1,511,871 shares of
Common Stock; (ii) the exercise of warrants to purchase 150,000 shares of
Common Stock at an exercise price of $9.50 per share, (iii) the exercise of
warrants to purchase 22,527 shares of Common Stock at an exercise price of
$4.375 per share and (iv) the exchange of the Preferred Shares into
3,403,075 shares of Common Stock.

(2) Assumes that the proceeds of the Warrants are used to reduce the Company's
short-term debt.

(3) The current portion of the Company's long-term debt aggregated $4,422,000
at December 31, 1995.

(4) The Company is party to a credit agreement which makes available to the
Company a maximum credit line of $60,000,000 through March 31, 1997. For
additional information on long-term debt, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity,
Financial Resources and Capital Expenditures."

(5) Actual and adjusted outstanding shares do not include (i) 1,330,092 shares
of Common Stock reserved for issuance upon exercise of outstanding stock
options or (ii) 395,339 shares of Common Stock reserved for issuance upon
exercise of outstanding warrants not offered hereby. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity, Financial Resources and Capital Expenditures."

(6) Assumes a Common Stock price of $17.25 per share, the actual price
on February 9, 1996, to calculate the effects of the Exchange Offer.

<PAGE>

SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

The selected consolidated financial data for the five
years ended December 31, 1995 are derived from the audited consolidated
financial statements of the Company. The selected consolidated financial data
set forth below should be read in conjunction with the Company's consolidated
financial statements and related notes thereto included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

YEARS ENDED
DECEMBER 31,
-------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues.................................... $220,044 $178,792 $134,334 $166,280 $150,636
Cost of products sold........................... 132,061 104,592 82,875 104,965 95,181
------- ------- ------ ------- ------
Gross margin.................................... 87,983 74,200 51,459 61,315 55,455
------ -------- ------ ------ ------
Operating expenses:
Advertising and promotion..................... 31,240 30,616 23,537 22,826 22,848
Other selling and administrative.............. 35,868 26,974 25,640 30,345 29,372
Research and development...................... 7,886 7,288 7,451 6,861 6,213
Variable stock option plan.................... - - 4,046 - -
------------ ------------ -------- ------------ ------------
Total operating expenses........................ 74,994 64,878 60,674 60,032 58,433
------ -------- ------ ------ ------
Earnings (loss) from operations................. 12,989 9,322 (9,215) 1,283 (2,978)
Expenses related to resignation of former officer - - - (2,152) (3,807)
Net proceeds from Nintendo award................ - 12,124 - - -
Interest expense................................ (3,429) (2,609) (1,836) (1,550) (1,775)
Interest and other income....................... 439 365 136 210 1,020
----------- --------- ---------- --------- --------
Earnings (loss) before income taxes............. 9,999 19,202 (10,915) (2,209) (7,540)
Provision for income taxes ..................... 600 778 9 238 -
----------- --------- ------------- ----------- ------------
Net earnings (loss)............................. 9,399 18,424 (10,924) (2,447) (7,540)
Preferred stock dividends paid.................. - - - 782 3,127
Preferred stock dividends in arrears............ 3,127 3,127 3,127 2,345 -
----- --------- --------- -------- ----------
Net earnings (loss) applicable to common shares. $6,272 $ 15,297 $(14,051) $ (5,574) $(10,667)
====== ======== ========= ========== =========
Net earnings (loss) per common share
Primary....................................... $0.60 $1.51 $(1.47) $(0.59) $(1.14)
==== ==== ====== ====== ======
Fully-diluted................................. $0.60 $1.41 $(1.47) $(0.59) $(1.14)
==== ==== ======= ====== =======
Common shares and common share
equivalents outstanding-average............... 10,451 10,111 9,548 9,400 9,325

AT DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Working capital................................. $54,670 $53,219 $30,813 $27,070 $29,127
Total assets.................................... 120,084 100,766 71,005 71,604 64,016
Long-term debt.................................. 14,000 18,414 18,608 4,944 5,244
Shareholders' equity............................ 54,172 44,768 22,162 32,246 35,092

</TABLE>

<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The following table sets forth certain operating data (as a
percentage of the Company's net revenues) for the years ended December 31, 1995,
1994 and 1993:

YEARS ENDED
DECEMBER 31,
-----------------------------
1995 1994 1993
---- ---- ----

Net revenues 100.0% 100.0% 100.0%
Cost of products sold 60.0 58.5 61.7
------ ------ -----
Gross margin 40.0 41.5 38.3
Advertising and promotion expenses 14.2 17.1 17.5
Other selling and administrative expenses 16.3 15.1 19.1
Research and development expenses 3.6 4.1 5.6
Variable stock option plan expenses - - 3.0
------ ------ -----
Earnings (loss) from operations 5.9 5.2 (6.9)
Net proceeds from Nintendo award - 6.8 -
Interest expense (1.5) (1.5) (1.3)
Other income, net 0.2 0.2 0.1
Provision for income taxes (0.3) (0.4) -
----- ----- ----
Net earnings (loss) 4.3% 10.3% (8.1)%
===== ===== ======

Years Ended December 31, 1995 and 1994

In 1995, for the second consecutive year, the Company had
record sales and earnings in the fourth quarter, and the Company had its best
full year operating performance since 1989. That performance demonstrates that
management's current strategy to make Galoob a high growth company is working,
and management believes the Company is very well positioned to continue to build
on that strategy in 1996 and the foreseeable future.

Net revenues in 1995 were $220.0 million which represented a
23% increase from 1994 net revenues of $178.8 million. The strong sales growth
for 1995 was attributable to two principal factors: (1) the international unit
posted a new annual sales record of $80.7 million, an increase of 35% from 1994,
and (2) the Company's worldwide sales of girls' toys increased by more than 500%
to $88.0 million, which represented 40% of net revenues as compared to only 8%
of net revenues in 1994. The girls' toys line increase was led by the
introduction of the hugely popular Sky Dancers flying dolls, and a line of
miniature houses and accessories -- My Pretty DollHouse. The strength in the
girls' line is expected to continue in 1996 with a greatly expanded Sky Dancers
line, extensions to the My Pretty DollHouse line, and the

<PAGE>

reintroduction of the enormously popular Pound Puppies line that was the
all-time best selling line of plush animals during the 1980's and is licensed
for the first time by the Company.

In 1995, the Company's boys' toys business was again led by
its core brand, Micro Machines. Increases in the civilian, miliary and Star Wars
segments led Micro Machines to its twelfth consecutive quarter of U.S. retail
sales growth through the fourth quarter of 1995. A decline in consumer demand
for the Micro Machines Z-Bots and Power Rangers segments substantially reduced
the Company's shipments of these segments. This decline, and the discontinuance
of the Biker Mice from Mars line to domestic retailers, each of which was
anticipated, led to a decrease in boys' toys net worldwide sales of 22% as
compared to 1994. However, the Company's worldwide Micro Machines sales in 1995,
excluding Z-Bots and Power Rangers, grew by 15% over 1994.

The Company's male action category was expanded in 1995 from
just one, the international Biker Mice From Mars line, to include the
introduction of UltraForce based on the superhero animated television show
derived from the popular Malibu comics, and the Micro Machines Star Wars Action
Fleet line which creates a completely new size scale for the male action
category. In 1995, the Company also test marketed its Mutant League line based
on a syndicated television series and the Electronic Arts video games. However,
based essentially on the test market results, the Company decided not to pursue
a national rollout of the line.

The male action lines will continue to grow in 1996 with an
expanded Star Wars Action Fleet line, the introduction of Dragon Flyz, the line
of flying action figures plus vehicles and accessories, and the introduction of
the toy line for Turner Entertainment's spectacular animated action-adventure
series, The Real Adventures of Jonny Quest.

Gross margins were $88.0 million in 1995, an increase of 18.6%
or $13.8 million from 1994. The increase was due to higher sales volume offset
slightly by a lower gross margin rate. The gross margin rate decreased to 40.0%
in 1995 from 41.5% in 1994 due mainly to three factors. First, tooling and
packaging design costs were a higher percent of revenues in 1995 as compared to
1994 in support of the Company's expanded product line. Second, international
sales as a percentage of worldwide revenues were higher in 1995 compared to
1994. The Company's gross margin on international sales is significantly lower
than domestic sales because international prices are lower as the customer is
responsible for the cost of importing, promoting and reselling the product.
Third, sharp price increases on plastics and packaging materials occurred in the
third and fourth quarters of 1995. Such cost increases occurred too late in the
year for the Company to be able to pass on cost increases through product price
increases. These three factors, which reduced the gross margin rate, were
partially offset by the elimination of duty on toys imported into the United
States.

Advertising and promotion expenses were $31.2 million or 14.2%
of net revenues in 1995 as compared to $30.6 million or 17.1% of net revenues in
1994. The decrease in advertising and promotion expenses as a percent of net
revenues was a result of higher marketing efficiencies domestically, coupled
with the effects of the higher sales growth rate internationally where the
Company's distributors absorb their own advertising costs. Other selling and
administrative expenses were $35.9 million in 1995 as compared to $27.0 million
in 1994. The increase in expenses was due mainly to (1) higher planned personnel
costs as a result of the Company's growth and product line expansion, (2) higher
freight costs, and (3) higher legal

<PAGE>

expenses. Research and development expenses were $7.9 million in 1995 as
compared to $7.3 million in 1994, with the increase due to the expansion of the
number of product lines. Although overall operating expenses increased by $10.1
million in 1995 as compared to 1994, operating expenses as a percent of net
revenues declined to 34.1% in 1995 from 36.3% in 1994.

Earnings from operations were $13.0 million, an increase of
39% from 1994 earnings from operations of $9.3 million, based on net revenue
increases of 23%. The higher growth rate of earnings as compared to net revenues
indicates the positive leverage the Company is achieving on incremental net
revenue growth.

In 1994, the net proceeds of $12.1 million from the Nintendo
award represents the receipt, net of associated legal and related expenses, of
the Company's share of proceeds from its litigation with Nintendo of America,
Inc. The amount was reflected in 1994 results and had no impact on 1995 results.

Interest expense was $3.4 million in 1995 as compared to $2.6
million in 1994. The increase was due primarily to higher average borrowings
needed to fund working capital to support higher sales, offset by a slightly
lower interest rate in 1995 as compared to 1994 on the Company's revolving
credit facility.

Other income was $0.4 million in both 1995 and 1994.

Income tax expense for 1995 and 1994 includes provisions for
federal, state and foreign income taxes, after taking into account the available
net operating loss carryforwards from prior years. At December 31, 1995, the
Company has federal net operating loss carryforwards of approximately $7.3
million and unused federal tax credits of approximately $1.8 million available
to reduce taxes in future periods. (See Notes A and F of Notes to Consolidated
Financial Statements.)

In management's opinion, other than the sharp price increases
on plastics and packaging materials noted above, general inflation did not have
a material impact on the Company's business in 1995. The Company did not
implement any substantial price increases in 1995 or 1994 on continuing product
lines.

The toy industry is affected by changing consumer tastes,
shifting cultural and demographic trends and general economic conditions.
Consequently, the Company's results are dependent, in large part, on
management's experience in the toy industry and its ability to identify and
capitalize on current trends and market new products in a timely and efficient
manner. The Company may not always be able to anticipate changes in consumer
demand or to respond quickly to such changes once they are identified, and such
inabilities could have an adverse impact on the Company.

Historically, a relatively small number of items have
contributed a large portion of the Company's revenues in each year. A decrease
in popularity of a particular item during any year could have a material adverse
impact on revenues and profits for that year. The Company's strategy emphasizing
multi-year extendable brands is intended to mitigate such adverse impacts.

The Company does not carry insurance for political or economic
unrest or disruption for several reasons, including, but not limited to, costs
of such insurance and the limited insurance coverage

<PAGE>

available. The impact on the Company from such unrest or disruption would depend
on general factors, including, but not limited to, the nature, extent and
location of such unrest or disruption and the Company's ability to: (1) procure
alternative manufacturing sources outside of the country involved; (2) retrieve
its tooling; (3) relocate its production in sufficient time to meet demand; and
(4) pass cost increases likely to be incurred resultant from (1)-(3) above
through to the Company's customers as product price increases.

The Company's products are produced principally in China,
which currently is designated with MFN status by the United States. This allows
products imported into the United States from China to be accorded the most
favorable import duties. In late 1994, Congress approved the GATT (Uruguay
round), which allows imports into the United States of toy merchandise with
unconditional duty-free entry from any nation with MFN status. Generally, the
trade negotiations between China and the United States have been difficult, but
both sides have shown their willingness to resolve trade disputes and avoid
punitive sanctions. Punitive sanctions could result in the United States
imposing higher duties on selective Chinese-made products imported into the
United States (these sanctions would be put in place through Section 301 of the
Trade Act of 1974, as amended). In the past, Section 301 sanctions proposed by
the United States did not include sanctions or punitive damages against toy
imports from China. As such, the Company would be unaffected. The loss of MFN
status for China, however, would result in a substantial increase in import duty
for the Company's products produced in China and imported into the United
States. This increase in duty would be large enough that it could materially
affect the Company's business. Products shipped from China to other countries
should not be affected. Other toy companies also source product from China and
would be affected to similar degrees. However, the impact on the Company from
any significant change in duties on its Chinese-produced product would depend on
several factors including, but not limited to, the Company's ability to (1)
procure alternative manufacturing sources outside of China, (2) retrieve its
tooling located in China, (3) relocate its production in sufficient time to meet
demand; and (4) pass cost increases likely to be incurred resultant from (1)-(3)
above through to the Company's customers as product price increases.

In 1994, certain quotas on Chinese-produced toy products were
introduced in the European Economic Community. These quotas did not have a
material impact on the Company's business in 1995 and are not expected to have a
material impact in the foreseeable future.

Years Ended December 31, 1994 and 1993

In 1994, the Company was profitable and had its best
performance since 1989. This was a result of the successful implementation of
the Company's recovery plan which began in 1991.

The recovery plan objective was to reposition the Company to
enable it to generate sustainable profitability and growth. Essential to
reaching this objective were three key goals: (1) restore and expand the
Company's core business, the Micro Machines brand, (2) focus on growth
opportunities in new product areas, such as the male action category, and (3)
lower breakeven versus the 1990 cost profile. The new management team was put in
place in 1991.

Overall, consolidated net revenues, including both toy sales
and sales of the Game Genie video game enhancer, in 1994 were $178.8 million,
which represented a 33% increase from 1993 net sales

<PAGE>

of $134.3 million. Worldwide toy sales in 1994 achieved a 72% increase as
compared to 1993. Domestic toy sales rose by 103% and international toy sales
rose by 33% from 1993 to 1994.

In 1994, sales of Micro Machines products grew significantly
for the second consecutive year. Net sales in 1994 climbed to $113.0 million
which was a 59% increase over 1993 levels. This comes on top of a 55% increase
in sales in 1993 over 1992. A significant area of growth in the Micro Machines
line was from licensed products such as Star Wars, Star Trek and Power Rangers.
The Company also successfully entered a new, high-growth potential category-male
action. Biker Mice From Mars, which was introduced in late 1993, generated sales
in 1994 of $41.4 million as compared to $4.3 million in 1993. In late 1994,
shipments of two new products, Sky Dancers, a flying doll, and My Pretty
DollHouse commenced and generated sales of $3.3 million and $3.0 million,
respectively. Game Genie sales were $4.2 million in 1994 as compared to $32.8
million in 1993. This decrease in Game Genie sales reflected the normal maturity
cycle for such products and this trend is expected to continue.

Gross margin totaled $74.2 million in 1994, an increase of
$22.7 million from 1993. This increase was due to higher sales volume and a
higher gross margin rate. The gross margin rate improved to 41.5% in 1994 from
38.3% in 1993 due to three factors. First, the international gross margin rate
was higher due to a change in product mix. Second, the percent of U.S. sales to
worldwide sales was greater. The Company's gross margin rate on domestic sales
is significantly higher than foreign sales because foreign prices are lower as
the customer is responsible for the cost of importing and promoting the
products. Third, while tooling, packaging and other costs in the aggregate were
higher in 1994 compared to 1993, they were lower as a percent of sales in 1994
compared to 1993.

Advertising and promotion expenses were $30.6 million in 1994
compared to $23.5 million in 1993. The higher expenses were primarily a result
of an increase in planned domestic television advertising expense in connection
with the Company's expanded product lines. Other selling and administrative
expenses were $27.0 million in 1994 compared to $25.6 million in 1993. This
increase was due mainly to incentive compensation which was reinstated based on
the Company's 1994 performance. Research and development expenses were
approximately equal in 1994 compared to 1993.

The $4.0 million expense in 1993 related to the variable stock option plan
was a one-time charge.

The Company received $12.1 million in 1994 from the litigation
award from Nintendo of America, Inc. This amount was obtained by reducing the
gross award of $16.1 million by amounts due the Company's Game Genie licensors.
(See Note M to the Company's Consolidated Financial Statements.)

Interest expense in 1994 was $2.6 million compared to $1.8
million in 1993. An increase of $1.0 million was due to the Debentures being
outstanding during all of 1994 compared to being outstanding for less than 2
months in 1993. Interest was reduced by lower average borrowings under the
Company's line of credit in 1994, although interest rates were higher.

Other income was $0.4 million in 1994, as compared to $0.1
million in 1993.

<PAGE>

The income tax expense for 1994 includes provisions for
federal, state and foreign income taxes, after taking into account the available
net operating loss carryforwards from prior years. In 1993, the tax provision
represented only foreign income taxes as there was no taxable U.S. income. At
December 31, 1994, the Company had federal net operating loss carryforwards of
approximately $11.5 million and unused federal tax credits of approximately $1.7
million available to reduce taxes in future periods. (See Notes A and F to the
Company's Consolidated Financial Statements.)

The Company's breakeven point has been substantially reduced
since 1990. In 1994, the Company's earnings from operations were $9.3 million on
$178.8 million in sales, which was a $39.1 million improvement in earnings from
operations and a $51.9 million improvement in sales in comparison to 1990 sales
of $126.9 million and loss from operations of $29.8 million.

Liquidity, Financial Resources and Capital Expenditures

On March 31, 1995, the Company entered into an amended and
restated loan and security agreement (the "New Agreement") with Congress
Financial Corporation (Central). (See Note E to the Company's Consolidated
Financial Statements.)

Working capital was $54.7 million at December 31, 1995
compared to $53.2 million at December 31, 1994. The ratio of current assets to
current liabilities was 2.1 to 1.0 at December 31, 1995 compared to 2.4 to 1.0
at December 31, 1994.

The Company had no material commitments for capital
expenditures at December 31, 1995.

The Company believes that with its assets, the results of
operations and the New Agreement it has adequate liquidity and capital resources
to meet its current and anticipated operating needs.

Recent Accounting Pronouncement

The FASB issued a new standard, SFAS No. 123, "Accounting for
Stock-Based Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation cost
at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for employee
stock options and similar equity instruments under APB Opinion 25, "Accounting
for Stock Issued to Employees." Entities that continue to account for stock
options using APB Opinion 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied. The Company has not determined which
method it will follow in the future. The Company will be required to adopt the
new standard for the year ending December 31, 1996.

<PAGE>

BUSINESS

GENERAL

The Company designs, develops, markets and sells high quality toys
worldwide and has been engaged in the toy business since 1957. The Company's
strategies in selecting and developing product lines are to focus primarily on
low to medium priced extendable product lines that are brandable, to capitalize
on current trends in the toy industry and popular culture and to expand and
diversify its product categories. Consistent with these strategies, the types of
products which have produced the preponderance of the Company's revenues have
changed significantly. This product change evolved both by developing and
procuring new toys which are based on original ideas and by seeking to obtain
and develop new entertainment licenses.

The Company's products are generally sold worldwide, with a substantial
portion of its revenues derived from sales in the United States and Europe. The
Company sells its products principally to retailers in the United States and to
toy distributors outside of the United States. U.S. retail outlets for the
products include specialty toy retailers, discount and chain stores, catalog and
mail order companies, department stores and variety stores. See
"Business-Distribution and Sales." The Company's products are generally
manufactured overseas, primarily in the China.

The Company's results are dependent, in large part, on management's
experience in the toy industry and its ability to identify and capitalize on
current trends and market new products based on such trends in a timely and
efficient manner. As a result of changing consumer tastes, individual toys
usually have relatively short product lives. Consequently, an increase or
decrease in popularity of a particular item during any year could have a
material impact on revenues and profit for that year.

The Company has historically marketed a variety of toy products designed
for children of both sexes and of different age groups. In recent years, the
Company's main emphasis has been to revive, develop, extend and expand its core
brand, Micro Machines(R), and to diversify the balance of its other product
lines by building other multi-year thematic brands. See "Business-Licensing and
Related Rights; Trademarks."

Consistent with the extendable product life strategy, the Company's Micro
Machines product line, first introduced in 1987, has generated significant sales
for a much longer product life than most toy products, and the Company believes
that the product line will continue to generate significant sales in the
immediate future. Micro Machines sales represented 44% of the Company's total
revenues in 1995, 51% in 1994 and 41% in 1993. Continuing demand for this
product line was strong and shipments for certain new 1996 product lines
commenced in the fourth quarter of 1995. While the Micro Machines product line
has generated continuing sales for an extended period of time, there can be no
assurance that the demand for Micro Machines products will continue at current
or previous levels.

<PAGE>

PRODUCT LINE

The Company's 1996 product offering consists of four girls' lines,
including continuations and extensions of the Sky Dancers(R), My Pretty
DollHouse(TM) and Happy Ness(TM) lines, and also the new Pound Puppies(R) line;
and five boys' lines, including continuations and extensions of the Micro
Machines and Biker Mice From Mars(R) lines, and also the new Dragon Flyz(TM),
The Real Adventures of Jonny Quest(TM) and UltraForce(TM) lines.

In the girls' product area, the highly successful Sky Dancers flying doll
and accessory line has been extended to include new segments, including Pretty
Lights(R) with light-up flying dolls and launchers; smaller-size Fairy
Flyers(TM) flying dolls, pets and Magical Flying Carousel(TM) playset; Fairy
Tale Couples(TM); and the Flying Princess(TM) doll with graceful fluttering
wings. The My Pretty DollHouse line has been extended with Enchanted Castles(TM)
as well as new basic house and accessory styles. The Happy Ness line includes
play figures and playsets. The Company has also reintroduced a small-scale
version of Pound Puppies and Pound Pur-r-ries(R), the most successful plush toy
lines of the 1980's.

In the boys' product area, the Micro Machines line of miniature vehicles,
playsets and accessories now includes a new, larger Action Fleet(TM) scale of
Star Wars(R) articulated action figures, vehicles and playsets, as well as the
continuations and extensions of other successful Star Wars vehicles, figures and
playsets in the traditional Micro Machines scale. Other Micro Machines licensed
properties include Star Trek(R), Babylon 5(TM), Aliens(TM), James Bond 007(TM),
Indiana Jones(TM) and Predator(TM). A new segment, Exploration, features the
first Micro Machines that float in water. Finally, three innovative new Double
Takes(TM) playsets have been added--two in the Basic segments and one in the
Military segment. These transforming playsets feature two action play
environments in one toy.

The male action figure product area features three new lines, as well as
the continuation of the Biker Mice From Mars line in the international
marketplace. Dragon Flyz is an assortment of fully articulated flying warriors
with dragon-styled launchers. The Real Adventures of Jonny Quest is based on the
updated reintroduction of the classic 1960's animated television property from
Hanna- Barbera Cartoons and Turner Home Entertainment, featuring both real-world
and futuristic, virtual-reality QuestWorld(TM) figures and vehicles. The
UltraForce line of super heroes and villains is based on the successful comic
book series and animated television show.

The Company's 1995 product line consisted of continuations and extensions
of the Micro Machines line and introductions of several new product lines,
including a new extendable girls' brand, Sky Dancers dolls.

The Micro Machines line included the continuing licensed vehicles based on
the popular Star Wars motion picture trilogy. The Company had also added Star
Wars playsets depicting scenes from the movies and including action features,
figures and vehicles. Other licensed products included vehicles and figures from
the Power Rangers(TM) television series and the James Bond 007 motion picture.
There were also new vehicles from the Star Trek and Babylon 5 television series.
To extend the Micro Machines segment of military vehicles and troops, new
playsets included Night Attack!(TM), with its battery-powered searchlight and
multi-missile launcher, as well as FalconWing Skybase(TM) and Orion J-22(TM)
Submarine Base transforming

<PAGE>

playsets. Also under the Micro Machines brand was Z-Bots(R), a line of
collectible robot figures, vehicles and playsets.

The Company's new My Pretty DollHouse line was based on a
classic girls' toys play pattern that incorporated the successful concepts of
miniaturization and collectibility. This product line consisted of modular,
finely-decorated miniature dollhouses that came with dolls and other surprise
accessories. Also available were coordinated designer Furniture Packs, Back and
Front Yard Sets, and snap-on 2nd Story Additions to expand the houses into even
bigger mansions.

Also introduced was UltraForce, a licensed male action line of
dramatic super heroes and villains, vehicles and accessories, based on the
Malibu(TM) (Marvel) Comics(TM) strips and the new syndicated animated television
series that premiered in October 1995.

LICENSING AND RELATED RIGHTS; TRADEMARKS

In addition, the Company pays royalties to its licensors which
typically range from 2% to 14% of net sales. In certain instances, the Company
may agree to guarantee payment of a minimum royalty. As of December 31, 1995 and
1994, minimum future guaranteed payments aggregated approximately $5,822,000 and
$2,630,000, respectively. Royalties expense in 1995 and 1994 totaled
approximately $16,326,000 and $13,498,000, respectively. As a result of
increased competition among toy companies for licenses, in certain instances the
Company has paid, and may in the future be required to pay, higher royalties and
higher minimum guaranteed payments in order to obtain attractive properties for
the development of product lines.

The Company is an active participant in the market for
entertainment licenses, and the Company has obtained domestic and international
license rights for most of its products. A determination to acquire an
entertainment license must frequently be made before the commercial introduction
of the property in which a licensed character or property appears, and license
arrangements often require the payment of non-refundable advances or guaranteed
minimum royalties. Accordingly, the success of an entertainment licensing
program is dependent upon the ability of management to assess accurately the
future success and popularity of the properties which it is evaluating, to bid
for products on a selective basis in accordance with such evaluation, and to
capitalize on the properties for which it has obtained licenses in an

<PAGE>

expeditious manner. In 1995 and 1994, the Company generated significant sales
under existing entertainment license arrangements for Star Wars, Star Trek,
Biker Mice From Mars and Power Rangers.

As part of its strategic licensing program, the Company has
signed an agreement with Twentieth-Century Fox Licensing and Merchandising that
gives the Company the exclusive worldwide first rights to license toys based on
all new Fox theatrical and television properties until the year 2004 (including
renewal rights granted to the Company). The agreement fulfills a key growth
objective of forming an alliance with a powerful content provider and assures
access to a continuous flow of first-rank entertainment properties from
Twentieth-Century Fox Film Corporation, Fox Animation Studios, Twentieth-Century
Fox Television, Fox Broadcasting Company, Fox Family Films, Fox 2000 Pictures,
and Fox Searchlight Pictures. Pursuant to this agreement, the Company has
determined to initially produce toys based on the recently announced full length
feature film Anastasia(TM), as well as the current hit television science
fiction series Space: Above and Beyond(TM).

In addition to the Twentieth-Century Fox agreement, the
Company has signed a master toy license agreement with Turner Home Entertainment
for The Real Adventures of Jonny Quest.

The Company has also been awarded the master toy license by
Sony signatures for TriStar Pictures' science fiction adventure Starship
Troopers(TM), which is being produced under an arrangement between TriStar
Pictures and the Walt Disney Motion Pictures Group.

RESEARCH AND DEVELOPMENT

The Company employs its own designers and engineers and also
utilizes the services of independent designers and engineers on an ongoing
basis. The Company presents its designers with toy concepts licensed or, to a
lesser extent, originated by it, and the designers create renderings of the
proposed product. Designs are then presented to the Company's engineers, who,
using the renderings, perform mechanical drawings and engineering services and
create prototypes for new products. Prototypes for proposed products are then
reviewed by the Company's management, including representatives of marketing,
sales and manufacturing, prior to final acceptance. Character licensors usually
retain the right to approve the products being marketed by the Company.

The Company spent approximately $7,886,000, $7,288,000 and
$7,451,000 on research and development activities in 1995, 1994 and 1993,
respectively, exclusive of amounts paid to certain inventors and designers who
receive royalties as licensors. Those amounts do not include approximately
$12,388,000, $7,149,000 and $4,502,000 incurred in 1995, 1994 and 1993,
respectively, for tooling and package design.

<PAGE>

MANUFACTURING

The Company's products are manufactured to its specifications
by nonaffiliated third party vendors, usually located in the Orient. Over 80% of
the Company's products were produced in China in 1995. These vendors are
responsible for all aspects of the production of the Company's products in
accordance with Company specifications.

The Company's manufacturing is currently performed by 21
manufacturers, some of whom derive a substantial percentage of their business
from the Company. In 1995, seven manufacturers each produced in excess of 5% of
the Company's products and combined to produce 91%. It is anticipated in 1996
that manufacturers' production will be similarly concentrated as in 1995.

The Company, through its wholly-owned subsidiary Galco
International Toys, N.V. ("Galco") located in Hong Kong, maintains close contact
with the Company's manufacturers and subcontractors and monitors the quality of
the products produced. Decisions related to the choice of manufacturer are based
on price, quality of merchandise, reliability and the ability of a manufacturer
to meet the Company's timing requirements for delivery. See
"Business-Competition." Generally, tooling is owned by the Company but may be
utilized by different manufacturers if the need arises for alternate sources of
production.

The Company does not carry insurance for political or economic
unrest or disruption for several reasons, including, but not limited to, costs
of such insurance and the limited insurance coverage available. The impact on
the Company from such unrest or disruption would depend on several factors,
including, but not limited to, the nature, extent and location of such unrest or
disruption and the Company's ability to: (1) procure alternative manufacturing
sources outside of the country involved; (2) retrieve its tooling; (3) relocate
its production in sufficient time to meet demand; and (4) pass cost increases
likely to be incurred resultant from (1) - (3) above through to the Company's
customers as product price increases.

The Company's products are principally produced in China,
which currently is designated with MFN status by the United States. This
designation allows products imported into the United States from China to be
accorded the most favorable import duties. In late 1994, Congress approved the
GATT (Uruguay round), which allows imports into the United States of toy
merchandise with unconditional duty- free entry from any nation with MFN status.
Generally, the trade negotiations between China and the United States have been
difficult, but both sides have shown their willingness to resolve trade disputes
and avoid punitive sanctions, which could result in the United States imposing
higher duties on selective Chinese-made products imported into the United States
(these sanctions would be put in place through Section 301 of the Trade Act of
1974, as amended). In the past, Section 301 sanctions proposed by the United
States did not include sanctions or punitive damages against toy imports from
China. As such, the Company would be unaffected. The loss of MFN status for
China, however, would result in a substantial increase in duty for the Company's
products produced in China and imported into the United States. This increase in
duty would be large enough that it could materially affect the Company's
business. Products shipped from China to other countries should not be affected.
Other toy companies also source product from China and would be affected to
similar degrees. However, the impact on the Company from any significant change
in duties on its Chinese-produced products would depend on several factors
including, but not limited to, the Company's ability to (1) procure alternative
manufacturing sources outside of China, (2) retrieve its tooling located in

<PAGE>

China, (3) relocate its production in sufficient time to meet demand and (4)
pass cost increases likely to be incurred resultant from (1) - (3) above through
to the Company's customers as product price increases.

In 1994, certain quotas on Chinese-produced toy products were
introduced in the European Economic Community. The quotas did not have a
material impact on the Company's business in 1995 and are not expected to
have a material impact on the Company's business in the foreseeable future.

Transactions in which the Company purchases goods from
manufacturers are mostly denominated in Hong Kong dollars and, accordingly,
fluctuations in Hong Kong monetary exchange rates may have an impact on cost of
goods. However, in recent years, the value of the Hong Kong dollar has had a
continuing stable relationship to the value of the U.S. dollar and the Company
has not experienced any significant foreign currency fluctuations. Inflationary
pressure in China could have an effect on the cost of product sourced from
China.

Galco's employees arrange with manufacturers for the
production, shipment and delivery of products, monitor the quality of the
products produced, and undertake certain elements of the design and development
of new products.

The principal raw materials used in the production and sale of
the Company's products are plastics and paper products. The Company believes
that an adequate supply of raw materials used in the manufacture of its products
are readily available from existing and alternate sources.

DISTRIBUTION AND SALES

The Company markets and sells its products throughout the
world, with sales to customers in the United States aggregating on a
consolidated basis 63%, 66% and 66% of net sales in 1995, 1994 and 1993,
respectively.

Outlets for the Company's products in the United States
include specialty toy retailers, discount and chain stores, catalog and mail
order companies, department stores, variety stores and independent distributors
which purchase the products directly from the Company and ship them to retail
outlets. In 1995 and 1994, Toys "R" Us, Inc. accounted for approximately 20% and
21% of the Company's consolidated net sales, respectively. Wal-Mart accounted
for approximately 11% of net sales in 1995.

The Company has a sales staff of seven people, supplemented by
several manufacturers' representative organizations in the United States, that
act as independent contractors. The Company's sales staff and the manufacturers'
representatives offer the Company's products through the use of samples and
promotional materials at toy shows and by making regular customer sales calls.
The Company also directly introduces and markets to customers new products and
extensions to previously marketed product lines by participating in the major
trade shows in New York, Hong Kong and Europe and through the maintenance of a
showroom in New York City. Manufacturers' representatives utilized by the
Company receive commissions, which were approximately 0.8%, 1.0% and 1.3% of net
sales in 1995, 1994 and 1993, respectively.

<PAGE>

The Company utilizes warehouse facilities primarily in Union
City, California for storage of its products. Disruptions in shipments from Asia
or from the Union City facility could have a material adverse effect on the
Company. The Company believes that adequate storage facilities are available.

The Company has an extensive international sales program. The
Company, in conjunction with Galco, actively sells its products into 45
countries and sells directly to 86 separate, independent toy distributors, each
of which is domiciled in the respective country to which sales are made. While
international sales accounted for only approximately one-third of total Company
sales in 1995, these sales amount to a greater proportion of the volume of
Company products sold outside of the United States. International sale prices to
distributors are significantly lower than U.S. domestic sale prices to retail
accounts since international distributors are responsible for all importation,
warehousing, marketing, promotional and selling related costs. In 1995,
approximately 50% of all Galoob toys sold were shipped to countries outside the
United States.

Sales by the Company to foreign customers are ordinarily
denominated in U.S. dollars and, accordingly, the Company's revenues are not
affected by fluctuations in monetary exchange rates. However, the value of the
U.S. dollar in relation to the value of other currencies may have a positive or
negative impact on the Company's sales volume over time, depending on the change
in relationship of the respective currencies.

The Company does not ordinarily sell its products on
consignment and ordinarily accepts returns only for defective merchandise.
Returns have historically not been significant. In certain instances, where
retailers are unable to resell the quantity of products which they have
purchased from the Company, the Company may, in accordance with industry
practice, assist retailers to sell such excess inventory by offering discounts
and other price concessions.

ADVERTISING

Although a portion of the Company's advertising budget is
expended for newspaper advertising, magazine advertising, catalogs and other
promotional materials, the Company allocates the bulk of its advertising budget
to television. As is common practice in the toy industry, the Company advertises
on national network, syndicated cable and local spot television.

SEASONALITY AND BACKLOG

Because of heavy retail demand for toy products during the
Christmas season, the toy industry is highly seasonal in nature. Consistent with
the fact that a disproportionate share of receivables is created late in the
year and consistent with U.S. toy industry practices, receivables from a
significant portion of domestic sales are not collected until the final weeks of
the fourth quarter and the first quarter of the succeeding year, which creates a
substantial demand for working capital on a seasonal basis.

Orders in the U.S. toy industry are generally cancelable until shipped.
Therefore, the Company believes that backlog may not be an accurate indicator of
the Company's future sales.

<PAGE>

COMPETITION

The toy industry is highly competitive. The Company competes
with several larger domestic and foreign toy companies, such as Hasbro, Mattel,
Tyco, Bandai and Playmates, and many smaller companies in the design and
development of new toys, the procurement of licenses, the improvement and
expansion of previously introduced products and product lines, and the marketing
and distribution of its products. Some of these companies have longer operating
histories, broader product lines and greater financial resources and advertising
budgets than the Company. In addition, it is common in the toy industry for
companies to market products which are similar to products being successfully
marketed by competitors. The Company believes that the strength of its
management team, the quality of its products, its relationships with inventors,
designers and licensors, its distribution channels and its overhead and
operational controls allow the Company to compete effectively in the
marketplace. See "Business-Research and Development" and "Business-Distribution
and Sales."

GOVERNMENT REGULATIONS

The Company is subject to the provisions of, among other laws,
the Federal Hazardous Substances Act and the Federal Consumer Product Safety
Act. These laws empower the CPSC to protect consumers from hazardous toys and
other articles. The CPSC has the authority to exclude from the market articles
which are found to be hazardous and can require a manufacturer to recall such
products under certain circumstances. Similar laws exist in some states and
cities in the United States and in Canada and Europe. Products are also designed
and tested to meet or exceed ASTM F963, the Standard Consumer Safety
Specification on Toy Safety. The Company emphasizes the safety and reliability
of its products and has established a strong quality assurance and control
program to meet the Company's objective of delivering high-quality, safe
products.

EMPLOYEES

As of December 31, 1995, the Company had 224 employees; 125 in
the United States and 99 in the Far East. This compares to 239 total employees
at December 31, 1994; 108 in the United States and 131 in the Far East. Nine of
the Company's employees, some of which are employed only on a seasonal basis,
are subject to a collective bargaining agreement which expires May 31, 1998. The
Company believes that its labor relations are satisfactory.

PROPERTIES

The Company's principal executive offices are located at 500
Forbes Boulevard, South San Francisco, California, where the Company owns a
building with approximately 136,000 square feet. The Company occupies
approximately 33,000 square feet of office space and leases the remaining
103,000 square feet of warehouse space to third parties. The Company also has
125,000 square feet of warehouse space at Union City, California, under a lease
which expires in 1997, with rights to renew for an additional five-year term.
The Company has a showroom, consisting of approximately 17,200 square feet,
which is located at 1107 Broadway, New York, New York, under a lease that
expires in 2006, and office and warehouse space in Hong Kong consisting of
approximately 30,000 square feet under leases which expire at varying dates
through 1998. The Company's properties will be expanded as necessary to support
future growth levels in the Company's business.

<PAGE>

MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

The executive officers and members of the Board of the Company
and their respective positions are as follows:

NAME AGE POSITION
- ----- ----- --------

Mark D. Goldman 45 President, Chief Executive Officer
and Director
William G. Catron 50 Executive Vice President, General
Counsel, Chief Administrative Officer
and Secretary
Loren Hildebrand 56 Executive Vice President, Sales
Ronald Hirschfeld 45 Executive Vice President, International
Sales and Marketing
Gary J. Niles 56 Executive Vice President, Marketing
and Product Acquisition
Louis R. Novak 47 Executive Vice President and Chief
Operating Officer
William B. Towne 51 Executive Vice President, Finance and
Chief Financial Officer
John C. Beuttell 48 Senior Vice President, Marketing-Male
Action
H. Alan Gaudie 55 Senior Vice President, Finance and
Assistant Secretary
Ronnie Soong 49 Managing Director of Galco
International Toys, N.V
Terrell (Mark) Taylor 54 Senior Vice President, Preliminary
Design
Andrew J. Cavanaugh 49 Director
Paul A. Gliebe, Jr 61 Director
Scott R. Heldfond 50 Director
Hoffer Kaback 46 Director
Roger Kowalsky 61 Director
S. Lee Kling 66 Director
Martin Nussbaum 48 Director
George Riordan 62 Director

<PAGE>

Mark D. Goldman, a Director of the Company, has served as President
and Chief Executive Officer of the Company since June 1991. From 1987 to 1991,
Mr. Goldman served as Executive Vice President and Chief Operating Officer.
Prior to 1987, Mr. Goldman served in various executive
capacities at Ages Entertainment Software, Inc. (formerly Sega Enterprises,
Inc.) and Mattel, Inc.

William G. Catron has served as Executive Vice President, General
Counsel and Chief Administrative Officer since May 1992. From 1985 to 1992, Mr.
Catron was Senior Vice President, Assistant General Counsel for Paramount
Pictures Corporation. Prior to 1985, Mr. Catron served in
various executive capacities at Ages Entertainment Software, Inc. (formerly Sega
Enterprises, Inc.) and Mattel, Inc.

Loren Hildebrand has served as Executive Vice President, Sales since
April 1994. From 1992 to 1994 he was President of Creative Consultants. From
1989 to 1992, Mr. Hildebrand was Executive Vice President and a partner in Toy
Soldiers, Inc., a start-up company. Prior to 1989, Mr. Hildebrand was a
consultant for Worlds of Wonder and Executive Vice President, Sales,
Merchandising and Distribution for Mattel, Inc.

Ronald Hirschfeld has served as Executive Vice President,
International Sales and Marketing since February 1994. From 1989 to 1994, Mr.
Hirschfeld served as Senior Vice President, International Sales and Marketing.
Prior to 1989, Mr. Hirschfeld served as Senior Vice President, International
Operations from 1987 to 1989 and has held various positions with the Company
since 1978.

Gary J. Niles has served as Executive Vice President, Marketing and
Product Acquisition since February 1992. From 1989 to 1992, Mr. Niles served as
Senior Vice President, International Division. Before joining the Company, Mr.
Niles was an executive with U.A.C., Ltd., a division of
Universal Matchbox, Revell Incorporated and Ages Entertainment Software, Inc.
(formerly Sega Enterprises, Inc.)

Louis R. Novak has served as Executive Vice President and Chief
Operating Officer since February 1992. From 1989 to 1992, Mr. Novak served as
Senior Vice President, Operations. From 1986 to 1989 he was Senior Vice
President, Worldwide Product Operations for Coleco Industries,
Inc. Prior to 1986, Mr. Novak was an executive with All American Gourmet
Company, Inc., a manufacturer of frozen food products, and for Mattel, Inc.

William B. Towne has served as Executive Vice President, Finance and
Chief Financial Officer since March 1995. From 1990 to 1995, Mr. Towne served as
Executive Vice President, Chief Financial Officer for Forstmann & Co, Inc. From
1982 to 1990, Mr. Towne worked for Tambrands, Inc. where he rose from Manager of
Forecast and Planning to Chief Financial Officer of their International
Divisions.

John C. Beuttell has served as Senior Vice President, Marketing - Male
Action since February 1996. Prior to undertaking his current position, Mr.
Beuttell held a senior management position at YES Entertainment. Before joining
YES Entertainment, Mr. Beuttell held several senior management positions,
including the following: Vice President of Sales and Marketing for a toy company
called TSR, President of Matchbox Toys-USA, Vice President of International for
Atari Video Games and Director of Marketing for Mattel, Barbie Division.

<PAGE>

H. Alan Gaudie has served as Senior Vice President, Finance since
April 1992. From 1985 to 1992, Mr. Gaudie served as Corporate Controller, Vice
President, Senior Vice President and acting Chief Financial Officer.

Ronnie Soong has served as Managing Director of Galco
International Toys, N.V., a wholly-owned subsidiary of the Company ("Galco"),
since May 1995. From April 1993 to 1995, Mr. Soong served as General Manager of
Galco. From 1989 to 1993, Mr. Soong was General Manager of Zindart Industrial
Co., Ltd. Prior to 1989, Mr. Soong was the General Manager of Buddy L (HK) Ltd.
and an executive with the Ertl Company in Taiwan.

Terrell (Mark) Taylor has served as Senior Vice President,
Preliminary Design since November 1995. From 1988 to 1995, Mr. Taylor served as
Senior Vice President, Product Design for Mattel, Inc. From 1987 to 1988, Mr.
Taylor served as Vice President with Entertech/LJN Toys. Prior to 1987, Mr.
Taylor served in various executive capacities at Playmates Toys, Tomy Toys, and
Mattel, Inc. In addition, Mr. Taylor was a principal partner with Taylor/Salari
Design.

Andrew J. Cavanaugh, a Director of the Company, serves as a Senior
Vice President--Corporate Human Resources of Estee Lauder Inc. Mr.
Cavanaugh has been affiliated with Estee Lauder in an executive capacity since
1988. Prior to undertaking his current position, Mr. Cavanaugh served as a
Senior Consultant with Coopers and Lybrand, New York City, from 1986 through
1988, and Senior Vice President--Administration of Paramount Pictures
Corporation from 1984 through 1986.

Paul A. Gliebe, Jr., a Director of the Company, has been a Vice
President of Smith Barney Shearson Inc. since 1982. Smith Barney Shearson Inc.
has provided investment-related services to the Company in the past and during
the current fiscal year.

Scott R. Heldfond, a Director of the Company, has served as President
and Chief Executive Officer of the Real Estate/Investment Division of Rollins
Hudig Hall (the successor entity to DSI Insurance Services), an insurance
brokerage firm ("RHH"), since 1985. The Company has retained
the services of RHH in the past and during the current fiscal year. See "Certain
Transactions."

Hoffer Kaback, a Director of the Company, has served as the President
of Gloucester Capital Corporation, an investment firm, since 1980 and has been a
General Partner of Bosworth Partners, an investment partnership, since 1986. Mr.
Kaback serves on the Boards of Directors of
Biotechnology General Corp. and Sunshine Mining and Refining Company.

Roger Kowalsky, a Director of the Company, served from 1983 to 1986 as
Senior Vice President, Finance & Administration for Yale Materials Handling
Corporation. Prior to such time, from 1969 to 1982, Mr. Kowalsky worked at
Pullman Inc., rising to Executive Vice President, Finance & Administration and
President of Pullman Trailmobile, a subsidiary of Pullman Inc. Since 1989, Mr.
Kowalsky has served as Director of the Vermont Studio Center, an organization
dedicated to visual artists and writers located in northern Vermont. From 1986
to 1989, Mr. Kowalsky was retired.

S. Lee Kling, a Director of the Company, has served since 1991 as
Chairman of the Board of Kling Rechter & Company, a merchant banking company
which operates in partnership with Barclays Bank PLC. Mr. Kling served as
Chairman of the Board of Landmark Bancshares Corporation, a bank

<PAGE>

holding company in St. Louis, Missouri ("Landmark"), until December 1991 when
Landmark merged with Magna Group, Inc. Mr. Kling had served in such capacity
with Landmark since 1974 and had also served as Chief Executive Officer of
Landmark from 1974 through October 1990 except for the period
from May 1978 to January 1979 when he served as Assistant Special Counselor on
Inflation for the White House and Deputy for Ambassador Robert S. Strauss. Mr.
Kling serves on the Boards of Directors of Magna Group, Inc., Falcon Products,
Co., Bernard Chaus Inc., E-Systems, Inc., Top Air
Manufacturing, Inc., National Beverage Corp. and Hanover Direct, Inc.

Martin Nussbaum, a Director of the Company, has been a
partner of the law firm of Shereff, Friedman, Hoffman & Goodman, LLP since
1976. Mr. Nussbaum has served as Chairman of the Executive Committee of the
Company's Board of Directors since June 1991. The Company has retained Shereff,
Friedman, Hoffman & Goodman, LLP in the past and during the current fiscal
year. See "Certain Transactions."

George Riordan, a Director of the Company, has served as the
Managing Partner of George Riordan & Co., an investment banking
firm, since 1991. From 1989 to 1991, Mr. Riordan served as a
Managing Director of Dean Witter Reynolds. Mr. Riordan serves on
the Boards of Directors of the Macneal- Schwendler Corp. and
Pancho's Mexican Buffet, Inc.

COMMITTEES OF THE BOARD OF DIRECTORS

The Board of Directors has an Executive Committee, an Audit
Committee, a Nominating Committee, a Finance Committee, a Compensation Committee
and a Public Responsibility Committee.

The Executive Committee is composed of Martin Nussbaum, Andrew J.
Cavanaugh, Mark Goldman and Scott R. Heldfond. The Executive Committee has
the authority to act in place of the Board on all matters which would otherwise
come before the Board except for such matters which
are required by law or by the Company's Certificate of Incorporation or
By-Laws to be acted upon exclusively by the Board.

The Audit Committee is composed of Roger Kowalsky, Scott R.
Heldfond, Hoffer Kaback and S. Lee Kling. The Audit Committee is responsible for
reviewing the Company's financial statements, recommending the appointment of
the Company's independent auditors and reviewing the overall
scope of the audit.

The Nominating Committee is composed of Martin Nussbaum, Andrew J.
Cavanaugh and Roger Kowalsky. The Nominating Committee is responsible for
nominating persons for election as directors of the Company.

The Compensation Committee is composed of Andrew J. Cavanaugh, Scott
R. Heldfond and Martin Nussbaum. The Compensation Committee is responsible for
reviewing the compensation arrangements relating to senior officers of the
Company and administering and making recommendations to the Board regarding the
bonus plans for the senior officers of the Company. The Compensation Committee
also administers the Company's Amended and Restated 1984 Employee Stock Option
Plan, the 1994 Senior Management Stock Option Plan and the 1995 Non-Employee
Directors' Stock Option Plan.

<PAGE>

The Finance Committee is composed of Mark Goldman, Martin Nussbaum,
Roger Kowalsky and S. Lee Kling. The Finance Committee is responsible for
monitoring the Company's financial condition and reviewing its credit and other
financing arrangements.

The Public Responsibility Committee is composed of Paul A. Gliebe,
Jr., Mark Goldman, S. Lee Kling and George Riordan. The Public Responsibility
Committee is responsible for reviewing the operations of the Company regarding
product safety, environmental and corporate governance
issues.

<PAGE>
EXECUTIVE COMPENSATION

The following table summarizes the compensation paid by the
Company and its subsidiaries, as well as certain other compensation paid or
accrued, to the Chief Executive Officer of the Company and the other four most
highly compensated executive officers of the Company who earned in excess of
$100,000 for the Company's fiscal years ended December 31, 1993, 1994 and 1995
(each person appearing in the table is referred to as a "Named Executive"):

SUMMARY COMPENSATION TABLE (1)

LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------------------------- ------------------
OTHER
ANNUAL ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPEN- COMPEN-
POSITION YEAR ($) ($) SATION($) OPTIONS(#) SATION($)
-------- ---- ---- ----- --------- ---------- ---------

<S> <C> <C> <C> <C> <C> <C>
Mark D. Goldman 1995 400,000 750,000 0 200,000 3,980(3)
President and Chief 1994 400,000 600,000 0 229,630(2) 3,760(3)
Executive Officer 1993 319,500 0 0 29,630 3,540(3)
Gary J. Niles 1995 300,000 360,000 0 0 1,440(5)
Executive Vice President, 1994 261,055 316,800 0 157,870(4) 1,440(5)
Marketing and Product 1993 212,623 0 0 20,370 1,440(5)
Acquisition
Louis R. Novak 1995 272,803 334,567 0 0 870(7)
Executive Vice President 1994 261,055 316,800 0 157,870(6) 870(7)
and Chief Operating 1993 256,797 0 0 20,370 510(7)
Officer
Loren Hildebrand 1995 230,063 282,150 0 0 2,250(9)
Executive Vice President, 1994 159,375 275,000(8) 0 100,000 840(9)
Sales
William G. Catron 1995 236,729 217,745 0 0 870(13)
Executive Vice President, 1994 226,535 206,640 0 86,111(12) 870(13)
General Counsel, 1993 214,813 25,000(10) 27,429(11) 11,111 870(13)
Chief Administrative
Officer and Secretary
</TABLE>

(1) Other than as provided in this table, there were no other transactions
among the Named Executives and the Company which are required to be
reported in this table.

(2) Represents 229,630 options granted pursuant to the 1994 Senior
Management Stock Option Plan (the "1994 Plan"). Does not include 129,311
shares of Common Stock granted in connection with the termination of the
1992 Plan.

<PAGE>

(3) This amount represents $3,980 in premiums paid by the Company with
respect to term life insurance in 1995, $3,760 in premiums paid by the
Company with respect to term life insurance in 1994 and $3,540 in
premiums paid by the Company with respect to term life insurance in
1993.

(4) Represents 157,870 options granted pursuant to the 1994 Plan. Does not
include 88,900 shares of Common Stock granted in connection with the
termination of the 1992 Plan.

(5) This amount represents $1,440 in premiums paid by the Company with
respect to term life insurance in each of 1993, 1994 and 1995.

(6) Represents 157,870 options granted pursuant to the 1994 Plan. Does not
include 88,900 shares of Common Stock granted in connection with the
termination of the 1992 Plan.

(7) This amount represents $870 in premiums paid by the Company with respect
to term life insurance in each of 1994 and 1995 and $510 in premiums
paid by the Company with respect to term life insurance in 1993.

(8) This amount includes a $50,000 bonus paid to the Named Executive in
connection with the Named Executive's hiring.

(9) This amount represents $2,250 in premiums paid by the Company with
respect to term life insurance in 1995 and $840 in premiums paid by the
Company with respect to term life insurance in 1994.

(10) This amount represents a bonus paid to the Named Executive in connection
with the Named Executive's hiring.

(11) This amount includes an automobile allowance (which is provided to all
senior officers of the Company) paid by the Company in 1993 in the
amount of $14,400 and fees paid by the Company to the Company's
accountants in the amount of $7,700 in 1993 in connection with the Named
Executive's hiring.

(12) Represents 86,111 options granted pursuant to the 1994 Senior Management
Stock Option Plan. Does not include 48,491 shares of Common Stock
granted in connection with the termination of the 1992 Plan.

(13) This amount represents $870 in premiums paid by the Company with respect
to term life insurance in each of 1993, 1994 and 1995.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee are set forth under
"Management--Committees of the Board of Directors" and their relationship with
the Company is set forth under "Management--Executive Officers and Directors."

<PAGE>

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth certain information regarding
options granted to the Named Executives during the Company's 1995 fiscal year:

INDIVIDUAL GRANTS
-----------------------------------------------------------
SHARES OF % OF TOTAL
COMMON OPTIONS Potential Realized Value at Assumed
STOCK GRANTED TO Annual Rates of Stock Price
UNDERLYING EMPLOYEES IN EXERCISE Appreciation for Option Term
OPTIONS FISCAL YEAR PRICE EXPIRATION ----------------------------------------
NAME GRANTED(#) (OF 320,000) ($/sh) DATE 5%($)(2) 10%($)(3)
- ---- ---------- ------------ ------ ---- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Goldman......... 200,000(1) 62.5% 6.125 m 4/18/05 770,396 1,952,335
Gary J. Niles .......... 0 N/A N/A N/A N/A N/A
Louis R. Novak ......... 0 N/A N/A N/A N/A N/A
Loren Hildebrand........ 0 N/A N/A N/A N/A N/A

William G. Catron....... 0 N/A N/A N/A N/A N/A
</TABLE>

- ---------------
(1) Options granted under the Amended and Restated 1984 Employee Stock Option
Plan.
(2) The projected stock price would be $9.98 per share.
(3) The projected stock price would be $15.89 per share.

Without the prior consent of the Company, the Named Executives
may not sell or otherwise transfer the shares of Common Stock acquired upon the
exercise of any option listed in the above table for seven months following the
date that a participant exercises such option. If at any time during the first
six months of such seven-month period, the optionee ceases to be an employee of
the Company, the Company will have the right to repurchase, at the exercise
price therefor, the shares of Common Stock which the optionee had acquired upon
such option exercise. Unexercised options will automatically terminate on the
date that an optionee ceases to serve as an employee of the Company unless such
termination of the optionee's employment with the Company results from the his
or her retirement, death or disability.

The Company does not currently grant stock appreciation
rights.

<PAGE>

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth information with respect to the
options exercised by the Named Executives during the 1995 fiscal year and the
unexercised options held by the Named Executives as of the end of the Company's
1995 fiscal year.

NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR END (#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ------------------------------- ------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark D. Goldman....... 0 0 244,754 209,876 823,074 1,152,159
Gary J. Niles......... 2,500 7,500 156,080 6,790 442,320 18,673
Louis R. Novak........ 0 0 151,080 6,790 415,470 18,673
Loren Hildebrand...... 0 0 50,000 50,000 300,000 300,000
William G. Catron..... 0 0 82,408 3,703 226,622 10,183
</TABLE>

(1) The closing sales price of the Common Stock on the New York Stock
Exchange on December 31, 1995 was $11.75 per share.

STOCK OPTION PLANS

In 1984, the Board of Directors of the Company (the "Board")
adopted, and the stockholders approved, the 1984 Employee Stock Option Plan of
the Company (the "1984 Plan"). The 1984 Plan was developed to provide an
incentive to officers and employees of the Company by making available to them
an opportunity to acquire a proprietary interest or to increase their
proprietary interest in the Company. In 1994, the 1984 Plan was amended and
restated (the "Amended 1984 Plan") to extend the 1984 Plan until April 20, 2004
and to increase the aggregate number of shares available under the 1984 Plan.
Under the Amended 1984 Plan, the Compensation Committee is authorized to grant
options to officers and employees of the Company and certain of its subsidiaries
for up to an aggregate of 1,589,997 shares of Common Stock. The maximum term of
options granted under the Amended 1984 Plan is ten years. As of March 1, 1996,
the Company has granted options to purchase 1,361,468 shares to officers and
employees of the Company under the Amended 1984 Plan. The Amended 1984 Plan is
construed, interpreted and administered by the Compensation Committee and the
terms of exercise of specific options are determined by the Board.

In 1994, the Company terminated the 1992 Plan and adopted the
1994 Plan. The 1992 Plan was adopted as a one-time grant of options for 800,000
shares of Common Stock that vest over a three year period to certain members of
senior management of the Company. Under the 1994 Plan, each holder of options
under the 1992 Plan was granted new options at a fixed exercise price equal to
the fair market value of the Common Stock on the date of grant and also issued
shares of Common Stock in order to compensate such holder for forfeiting his or
her existing gain under such canceled option, measured by the difference between
the market price and the exercise price of the options on the date on which the
options were canceled. The maximum term of options granted under the 1994 Plan
is ten years. Options granted under

<PAGE>

the 1994 Plan are to be non-qualified stock options under the Internal Revenue
Code of 1986, as amended (the "Code").

The Company adopted the 1995 Non-Employee Directors' Stock
Option Plan (the "1995 Plan") in June 1995. The 1995 Plan was developed to
attract, retain and motivate non-employee directors and to encourage
non-employee directors to acquire an equity interest or increase their stock
ownership in the Company. Under the 1995 Plan, the Compensation Committee is
authorized to grant options to non-employee directors for up to 160,000 shares
of the Company's Common Stock. The maximum term of options granted under the
1995 Plan is ten years. Options granted are to be non-qualified stock options
under the Code. Under the 1995 Plan, non-employee directors are automatically
granted an option to purchase 2,000 shares of Common Stock on January 1 of each
calendar year. Options were also granted on July 1, 1995. As of March 1, 1996,
the Compensation Committee has granted options to purchase 32,000 shares of
Common Stock under the 1995 Plan. The 1995 Plan is construed, interpreted and
administered by the Compensation Committee.

SEVERANCE AGREEMENTS WITH MANAGEMENT

On October 27, 1994, the Company entered into a severance
agreement (the "Severance Agreement") with Mark Goldman, effective as of July
13, 1994. The Severance Agreement sets forth severance benefits which are
payable if Mr. Goldman's employment is terminated for various reasons, including
termination by him of his employment following a change in control of the
Company, as follows (the "Severance Payment"):

(i) If Mr. Goldman is terminated without cause (as defined in
the Severance Agreement) prior to a Change in Control (as defined in the
Severance Agreement), or if Mr. Goldman terminates his employment for good
reason (as defined in the Severance Agreement) prior to a Change in Control, the
Severance Agreement provides that the Company shall pay to Mr. Goldman a lump
sum payment equal to (a) two times Mr. Goldman's annualized current base
compensation and (b) the greater of (1) two times the greater of (x) the
incentive compensation bonus (excluding stock options or shares issued pursuant
to a stock option, restricted stock or similar plan or long-term incentive
bonuses) paid to Mr. Goldman for the previous year's performance or (y) the
incentive compensation bonus (excluding stock options or shares issued pursuant
to a stock option, restricted stock or similar plan or long-term incentive
bonuses) that would be payable to Mr. Goldman if performance relative to plan
for the current year was the same as performance relative to plan year-to-date
(such performance is to be measured by the ratio of year-to-date actual
performance divided by year-to-date plan performance; the index(es) of
performance shall be the same as the most recent annual cash incentive
compensation plan approved by the Board of Directors) (the amount equal to the
greater of the amounts described in clauses (x) and (y) shall be hereinafter
referred to as the "Annual Bonus"); or (2) five hundred thousand dollars
($500,000).

(ii) If Mr. Goldman is terminated by the Company within
twenty-four (24) months following a Change in Control (as defined in the
Severance Agreement), or if Mr. Goldman terminates his employment for good
reason (as defined in the Severance Agreement) within twenty-four (24) months
following a Change in Control, the Severance Agreement provides that the Company
shall pay to Mr. Goldman a lump sum payment equal to (a) three times Mr.
Goldman's annualized current base compensation, (b) the greater of (1) three
times the Annual Bonus or (2) five hundred thousand dollars ($500,000) and (c)
three times the car allowance in effect for Mr. Goldman at the time of
termination and a lump sum amount

<PAGE>

equal to three times the insurance and maintenance cost incurred for said
vehicle during Mr. Goldman's last full year of employment with the Corporation.
Furthermore, the Severance Agreement provides that the Company shall continue to
provide Mr. Goldman with certain fringe benefits for a period of three years
following the date of Mr. Goldman's termination, subject to mitigation by Mr.
Goldman.

(iii) If Mr. Goldman is terminated for cause, or if Mr.
Goldman terminates his employment other than for good reason (as defined in the
Severance Agreement), the Severance Agreement provides that the Company must pay
to Mr. Goldman his unpaid compensation for services prior to termination and the
value of any accrued unused vacation pay to the date of termination.

The maximum Severance Payment that the Company would have been required to make
under the Severance Agreement if such amount became payable in fiscal 1994 was
approximately $3,059,883.

Mr. Goldman is employed by the Company as its President and
Chief Executive Officer without an employment agreement. The Company has
purchased a life insurance policy in a $2,000,000 face amount for Mr. Goldman
who designated the beneficiary of such insurance policy.

All of the Executive Vice Presidents (six) of the Company have
entered into a letter agreement with the Company which provides, among other
things, that if the executive is terminated other than for cause the executive
is entitled to continue to receive his salary and certain benefits (excluding
bonus) for a period of up to twelve (12) months. These severance payments may be
reduced in the event that the executive commences regular full-time employment
during such period. In addition, if there is a change in control and the
executive's employment is terminated or the executive resigns under certain
circumstances, the executive shall instead receive a lump sum payment equal to a
multiple of such executive's salary, bonus and certain benefits, plus the
continuation of certain benefits for a specified period of time. None of the
Named Executives has an employment agreement with the Company.

DIRECTOR COMPENSATION

Directors who are not full-time employees of the Company
receive an annual fee of $15,000 plus $500 for each meeting of the Board or any
committee thereof attended by such director. In addition, non-employee directors
are automatically granted an option to purchase 2,000 shares of Common Stock on
January 1 of each year under the 1995 Non-Employee Directors' Stock Option Plan
adopted June 20, 1995. Options were also granted on July 1, 1995. See "Executive
Compensation--Stock Option Plans." All directors are reimbursed by the Company
for out-of-pocket expenses incurred by them as directors of the Company.

As compensation for Mr. Nussbaum's service as Chairman of the
Executive Committee of the Board of Directors, and in lieu of an annual
director's fee, Mr. Nussbaum received a fee of $15,000 per month from 1991
through September 1993 and $10,000 per month from October 1993 through March
1995. Commencing in April 1995, Mr. Nussbaum has been paid the annual director's
fee and meeting fees described above.

<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information as of March
1, 1996, with respect to the Common Stock of the Company beneficially owned by
(a) each director of the Company, (b) all persons known by the Company to be the
beneficial owner of more than 5% of the Common Stock of the Company, (c) the
Named Executives and (d) all executive officers and directors of the Company as
a group.

PERCENT OF COMMON
NAME OF BENEFICIAL OWNER NUMBER OF SHARES (1) STOCK OWNERSHIP (1)
- ------------------------ -------------------- -------------------
FMR Corp. (2) ........................... 1,060,937 10.0%
Cowen & Company (3) ..................... 899,500 8.9%
The Capital Group Companies, Inc. (4) ... 550,000 5.4%
College Retirement Equities Fund (5) .... 541,500 5.4%
Dimensional Fund Advisors, Inc. (6) ..... 517,400 5.1%
William G. Catron (7) ................... 124,137 1.2%
Andrew J. Cavanaugh (8) ................. 5,700 *
Paul A. Gliebe, Jr. (8) ................. 6,350 *
Mark D. Goldman (9) ..................... 659,041 6.2%
Scott R. Heldfond (8) ................... 7,450 *
Loren Hildebrand (10) ................... 100,000 *
Hoffer Kaback (8) ....................... 4,000 *
S. Lee Kling (8) ........................ 9,000 *
Roger Kowalsky (8) ...................... 7,000 *
Gary J. Niles (11) ...................... 197,634 1.9%
Louis R. Novak (12) ..................... 192,770 1.9%
Martin Nussbaum (13) .................... 11,473 *
George Riordan (8) ...................... 5,000 *
All executive officers and directors as a
group (consisting of 28 persons) (14) ... 1,629,354 14.4%

- -----------------------
* Less than 1%.

<PAGE>

(1) This table identifies persons having sole voting and/or investment
power with respect to the shares of Common Stock set forth opposite
their names as of March 1, 1996, according to the information
furnished to the Company by each of them. A person is deemed to be the
beneficial owner of shares of Common Stock that can be acquired by
such person within 60 days from the date of this Prospectus upon the
conversion of convertible securities or the exercise of warrants or
options. Percentage of Beneficial Ownership is based on a total of
10,101,241 shares of Common Stock outstanding and assumes in each case
that the person only, or group only, exercised his rights to purchase
all shares of Common Stock underlying convertible securities, options
or warrants.

(2) Address is 82 Devonshire Street, Boston, Massachusetts 02109. As set
forth in Amendment No. 6 to Schedule 13D filed February 20, 1996 filed
with the Securities and Exchange Commission (the "Commission").
Includes 545,337 shares of Common Stock issuable upon conversion of
Preferred Shares representing shares of $17.00 Preferred Stock, based
on a conversion price of 1.185 shares of Common Stock per Preferred
Share.

(3) Address is Financial Square, New York, New York 10005-3597. As set
forth in a Schedule 13G dated February 13, 1996 filed with the
Commission.

(4) Address is 333 South Hope Street, Los Angeles, California 90071. As
set forth in a joint Schedule 13G dated February 9, 1996 filed by The
Capital Group Companies, Inc. ("CGC"), Capital Research and Management
Company ("CRMC") and SMALLCAP World Fund, Inc. ("SMALLCAP") with the
Commission, CRMC, a registered investment adviser and a subsidiary of
CGC, is deemed to have beneficial ownership of these shares of Common
Stock, which shares are held by SMALLCAP, for which CRMC serves as
investment adviser. CGC and CRMC disclaim beneficial ownership of all
such shares.

(5) Address is 730 Third Avenue, New York, New York 10017. As set forth in
a Schedule 13G dated February 8, 1994 filed with the Commission.

(6) Address is 1299 Ocean Avenue, 11th Floor, Santa Monica, California
90401. As set forth in a Schedule 13G dated February 7, 1996 filed
with the Commission, Dimensional Fund Advisors, Inc. ("DFA"), a
registered investment adviser, is deemed to have beneficial ownership
of these shares of Common Stock, all of which shares are held in
portfolios of DFA Investment Dimensions Group, Inc., a registered
open-end investment company, or in series of the DFA Investment Trust
Company, a Delaware business trust, or the DFA Group Trust and DFA
Participation Group Trust, investment vehicles for qualified employee
benefit plans, for all of which DFA serves as investment manager. DFA
disclaims beneficial ownership of all such shares.

(7) Includes options to purchase 86,111 shares of Common Stock.

(8) Includes options to purchase 4,000 shares of Common Stock.

(9) Includes options to purchase 454,630 shares of Common Stock.

(10) Includes options to purchase 100,000 shares of Common Stock.

(11) Includes options to purchase 157,870 shares of Common Stock.

<PAGE>

(12) Includes options to purchase 157,870 shares of Common Stock.

(13) Includes (i) options to purchase 4,000 shares of Common Stock and (ii)
2,473 shares of Common Stock which are issuable upon exercise of a
warrant which was issued to Shereff, Friedman, Hoffman & Goodman, LLP
on December 11, 1991 in connection with Mr. Nussbaum's service as
Chairman of the Executive Committee of the Board of Directors. Mr.
Nussbaum disclaims beneficial ownership of the other shares of Common
Stock issuable upon exercise of the warrant.

(14) Includes an aggregate of options to purchase 1,252,092 shares of
Common Stock and 2,473 shares which may be acquired pursuant to the
exercise of a warrant.

<PAGE>

SELLING STOCKHOLDERS

The following table provides certain information with respect
to the shares of Common Stock beneficially owned by each Selling Stockholder.
The shares of Common Stock offered by this Prospectus may be offered from time
to time in whole or in part by the persons named below or by their transferees,
as to whom applicable information will be set forth in a prospectus supplement
to the extent required.

NUMBER OF SHARES OF
SHARES SHARES OF COMMON STOCK
OF COMMON COMMON STOCK AFTER GIVING
STOCK OWNED OFFERED FOR EFFECT
PRIOR TO THIS SALE IN THIS TO PROPOSED SALE
NAME AND ADDRESS OF BENEFICIAL OWNER (1) OFFERING (2) OFFERING IN THIS OFFERING
- ---------------------------------------- ------------ --------- ----------------
<S> <C> <C> <C>
Gerald Adler (3) 953 953 0
Adrienne Partners, L.P. (4) 7,559 7,559 0
Chesapeake Partners Institutional Fund Limited 19,438 19,438 0
Partnership (5)
Chesapeake Partners International Ltd. (5) 18,358 18,358 0
Chesapeake Partners Limited Partnership (5) 259,179 259,179 0
Davos Partners, L.P. (4) 42,116 42,116 0
Joseph F. Donley (3) 1,082 1,082 0
Forest Fulcrum Fund (6) 107,991 107,991 0
Estate of Stanley J. Friedman (3) 1,726 1,726 0
Gerard Klauer Mattison & Co., LLC (7) 150,000 150,000 0
Joel H. Goldberg (3) 1,545 1,545 0
Richard A. Goldberg (3) 1,167 1,167 0
Lawrence G. Goodman (3) 1,365 1,365 0
Michael A. Green (3) 1,120 1,120 0
Don D. Grubman (3) 747 747 0
Harvest Partners L.P. (8) 137,688 137,688 0
Highbridge Capital Corporation (9) 121,490 121,490 0
Jeffry S. Hoffman (3) 1,365 1,365 0
HPB Associates, L.P. (10) 161,987 161,987 0
Robert J. Jossen (3) 1,545 1,545 0
Andrew J. Levander (3) 1,545 1,545 0
Andrew J. Levinson (3) 902 902 0
Jeffrey Lowin (3) 1,030 1,030 0
Margery K. Neale (3) 876 876 0
James H. Nix (3) 1,041 1,041 0
Paloma Securities L.P. (11) 215,982 215,982 0
Quasar International Partners, C.V. (4) 58,315 58,315 0
</TABLE>

<PAGE>

(1) Except as set forth in the footnotes below, there are no material
relationships between any of the Selling Stockholders and the Company.

(2) Includes shares of Common Stock issuable upon conversion of the Debentures
or upon exercise of the Warrants.
(3) Address is c/o Shereff, Friedman, Hoffman & Goodman, LLP, 919 Third Avenue,
New York, New York 10022. The Company has retained the legal services of
Shereff, Friedman, Hoffman & Goodman, LLP in recent years.
See "Certain Transactions."
(4) Address is c/o D. Nolan Management Co., Inc., 245 Park Avenue, New
York, New York 10167.
(5) Address is c/o Goldman Sachs, 85 Broad Street, New York, New York
10004.
(6) Address is c/o Forest Investment Management, 53 Forest Avenue, Old
Greenwich, Connecticut 06870.
(7) Address is 529 Fifth Avenue, New York, New York 10017. The Company has
retained the financial advisory services of Gerard Klauer Mattison & Co.,
LLC in recent years.
See "Certain Transactions."
(8) Address is 885 Second Avenue, New York, New York 10017.
(9) Address is 767 Fifth Avenue, New York, New York 10153.
(10) Address is 888 Seventh Avenue, New York, New York 10106.
(11) Address is Two American Lane, Greenwich, Connecticut 06836-2571.
(12) Address is 777 Westchester Avenue, White Plains, New York 10604.
(13) Address is One Boston Place, Boston, Massachusetts 02018.
(14) Address is 222 North LaSalle Street, Chicago, Illinois 60601.

Each Selling Stockholder is registering the number of shares
of Common Stock set forth opposite its name above. Because the Selling
Stockholders may offer all or some part of the shares of Common Stock which they
hold pursuant to this Prospectus and because this Offering is not being
underwritten on a firm commitment basis, no estimate can be given as to the
amount of shares of Common Stock to be offered for sale by the Selling
Stockholders nor the amount of shares of Common Stock that will be held by the
Selling Stockholders upon termination of this Offering. See "Plan of
Distribution." To the extent required, the specific number of shares of Common
Stock to be sold by a

<PAGE>

Selling Stockholder in connection with a particular offer will be set forth in
an accompanying supplement to this Prospectus.

PLAN OF DISTRIBUTION

The Selling Stockholders may sell the Common Stock underlying
the Debentures and Warrants from time to time.

The shares of Common Stock being sold hereby may be offered to
purchasers directly by any of the Selling Stockholders or through underwriters,
brokers, dealers or agents from time to time in one or more transactions (i) in
the over-the-counter market, (ii) other than in the over-the-counter market or
(iii) through the writing of options (whether such options are listed on an
options exchange or otherwise) on, or in settlement of short sales of the shares
of Common Stock. Any of such transactions may be at market prices prevailing at
the time of sale, at prices related to such prevailing market prices, at varying
prices determined at the time of sale or at negotiated or fixed prices, in each
case as determined by the Selling Stockholders or by agreement between the
Selling Stockholders and such underwriters, brokers, dealers or agents or
purchasers if the Selling Stockholders effect such transaction by selling shares
to or through underwriters, brokers, dealers or agents, such underwriters,
brokers, dealers, or agents receive compensation in the form of discounts,
concessions or commissions from the Selling Stockholders and/or the purchasers
of securities for whom they may act as agent (which discounts, concessions or
commissions as to particular underwriters, brokers, dealers or agents may be in
excess of those customary in the types of transaction involved). The Selling
Stockholders and any dealers or agents that participate in the distribution of
the shares of Common Stock offered hereby may be deemed to be underwriters, and
any profit on the sale of such securities by them and any discounts,
commissions, or concessions received by any such dealers or agents might be
deemed to be underwriting discounts and commissions under the Securities Act.

The shares of Common Stock may be sold pursuant to this
Prospectus or pursuant to an available exemption from the registration
requirements of the Securities Act, such as the provisions of Rule 144
promulgated under the Securities Act, to the extent applicable. Under the
securities laws of certain states, the shares of Common Stock offered hereby may
be sold in such states only through registered or licensed brokers or dealers.
In addition, in certain states the shares of Common Stock may not be sold unless
the securities have been registered or qualified for sale in such state or an
exemption from registration or qualification is available with.

The Company will pay substantially all of the expenses
incident to this Offering, other than commissions and fees and fees of others
employed by a Selling Stockholder, including attorneys' fees. Under agreements
entered into with the Company, certain of the Selling Stockholders and any
broker-dealer they may utilize will be indemnified by the Company against
certain civil liabilities, including liabilities under the Securities Act. The
Company will not receive any of the proceeds from the sale of any of the
securities in this Offering by the Selling Stockholders.

Each Selling Stockholder will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including, without limitation, Rules 10b-2, 106-2 and 10b-7, which provisions
may limit the timing of purchases and sales of any of the securities by the
Selling

<PAGE>

Stockholders. All of the foregoing may affect the marketability of the shares of
Common Stock offered hereby.

CERTAIN TRANSACTIONS

The Company has retained the legal services of Shereff,
Friedman, Hoffman & Goodman, LLP in recent years. One of the Company's directors
is a partner of Shereff, Friedman, Hoffman & Goodman, LLP. Several partners and
former partners of Shereff, Friedman, Hoffman & Goodman, LLP are Selling
Stockholders. The total amount of fees paid to Shereff, Friedman, Hoffman &
Goodman, LLP in 1995 and 1994 were approximately $0.3 million and $0.4 million,
respectively, exclusive of the director's fees paid to Mr. Nussbaum, a partner
in the firm of Shereff, Friedman, Hoffman & Goodman, LLP, as compensation for
his service as Chairman of the Executive Committee of the Board of Directors.
See "Executive Compensation--Director Compensation."

The Company has retained the financial advisory services of
Gerard Klauer Mattison & Co., LLC in recent years. Gerard Klauer Mattison & Co.,
LLC is a Selling Stockholder. The total amount of fees paid to Gerard Klauer
Mattison & Co., LLC in 1994 was approximately $15,000. No fees were paid to
Gerard Klauer Mattison & Co., LLC in 1995.

The Company has retained the insurance brokerage services of
RHH in recent years. One of the Company's directors is the President and Chief
Executive Officer of Rollins Real Estate/Investment, a division of RHH. The
total amount of insurance premiums paid to RHH in 1995 and 1994 were
approximately $1.3 million and $1.4 million, respectively.

DESCRIPTION OF CAPITAL STOCK

The Company has an authorized capital of 50,000,000 shares of
Common Stock, and 1,000,000 shares of preferred stock, par value $1.00 per
share. As of March 1, 1996, 10,101,241 shares of Common Stock were outstanding,
held of record by approximately 1,500 persons and 1,839,500 Preferred Shares
representing 183,950 shares of $17.00 Preferred Stock were outstanding, held of
record by approximately 400 persons. On February 28, 1996, the Company commenced
the Exchange Offer for the Preferred Shares. See "Summary--Recent Developments."

COMMON STOCK

The holders of Common Stock are entitled to one vote per share
on all matters voted on by stockholders, including the election of directors,
other than the election of two directors by the holders of the $17.00 Preferred
Stock. See "Description of Capital Stock--Preferred Stock." Except as otherwise
required by law or provided in any resolution adopted by the Board with respect
to any series of preferred stock of the Company, the holders of Common Stock
exclusively possess all voting power. Subject to any preferential rights of any
outstanding series of preferred stock of the Company, the holders of Common
Stock are entitled to such dividends as may be declared from time to time by the
Board from funds available for distribution to such holders. No holder of Common
Stock has any preemptive right to subscribe to any securities of the Company of
any kind or class or any cumulative voting rights.

<PAGE>

PREFERRED STOCK

The Certificate authorizes the issuance of 1,000,000 shares of
preferred stock, in one or more series and having such rights, including voting,
conversion and redemption rights, and such preferences, including dividend and
liquidation preferences, as may be fixed by the Board, without any further
action by the stockholders of the Company. The Board issued 183,950 shares of
$17.00 Preferred Stock. In addition, the Board may from time to time, without
the consent of the holders of the $17.00 preferred stock, create and issue one
or more classes of other preferred stock, which may be junior or on a parity in
rank to the $17.00 Preferred Stock and may, among other things, be convertible
into shares of Common Stock. The terms of the $17.00 Preferred Stock and related
Preferred Shares are summarized below:

$17.00 Preferred Stock

General

The following description of terms of the $17.00 Preferred
Stock does not purport to be complete and is qualified in its entirety by
reference to the Certificate of Designations of the $17.00 Preferred Stock. A
copy of the Certificate of Designations may be obtained by any holder of
Preferred Shares at no cost, by written request to the Company.

Dividends

The holders of $17.00 Preferred Stock are entitled to receive,
when and as declared by the Board of Directors, out of funds legally available
therefor, cash dividends at an annual rate of $17.00 per share. Dividends are
payable quarterly, on January 1, April 1, July 1 and October 1 of each year, as
of January 1, 1990, to the holders of record at the close of business on the
record dates (within 45 days of the dividend payment dates) specified by the
Board at the times such dividends are declared. Dividends will be cumulative
from the date of issuance of the $17.00 Preferred Stock. Accrued but unpaid
dividends will not bear interest.

The $17.00 Preferred Stock has priority as to dividends over
the Common Stock and any other series or class of the Company's stock hereafter
issued which ranks junior to the $17.00 Preferred Stock as to dividends. No
dividends may be declared or paid or funds set apart for payment by the Company
on the Common Stock or any other of the Company's stock ranking junior to the
$17.00 Preferred Stock with respect to dividend rights (except dividends paid in
shares of stock ranking junior to the $17.00 Preferred Stock as to dividends),
unless prior to or concurrently with such declaration, payments, setting apart,
as the case may be, all accrued and unpaid dividends on shares of the $17.00
Preferred Stock have been declared and paid.

Conversion Rights

Each share of the $17.00 Preferred Stock is convertible, at
the option of the holder thereof, at any time, into shares of Common Stock at a
conversion price of $16.875 per share of Common Stock. For purposes of
conversion, each share of $17.00 Preferred Stock shall be valued at $200.00 per
share, which shall be divided by the then current conversion price to determine
the number of shares of Common

<PAGE>

Stock issuable upon conversion. No payment or adjustment will be made on account
of accrued dividends upon conversion of the $17.00 Preferred Stock. Holders of
shares of $17.00 Preferred Stock which are converted into shares of Common Stock
will be treated for all purposes, including the determination of stockholders
entitled to receive dividends on such $17.00 Preferred Stock or to receive
notice of and to vote at any meeting of stockholders, as holders of record of
Common Stock rather than $17.00 Preferred Stock as of the date of conversion.
The conversion price is subject to adjustment upon the occurrence of certain
events. The Company may at any time reduce the conversion price.

Liquidation Preference

Upon any voluntary or involuntary liquidation, dissolution or
winding up of the Company, holders of the $17.00 Preferred Stock will be
entitled to receive, out of assets of the Company available for distribution to
its stockholders, an amount in cash equal to $200.00 for each share of $17.00
Preferred Stock outstanding, plus any accrued and unpaid dividends to the date
of final distribution, before any distribution is made to holders of Common
Stock or any other shares of capital stock ranking junior to the $17.00
Preferred Stock in respect of distributions upon liquidation, dissolution or
winding up.

Voting Rights

The holders of the $17.00 Preferred Stock have no voting
rights except as described below or as required by Delaware law. In exercising
any of the voting rights described below, each outstanding share of $17.00
Preferred Stock will be entitled to one vote.

Whenever dividends on the $17.00 Preferred Stock or on any
other stock ranking pari passu as to dividends with the $17.00 Preferred Stock
("Parity Dividend Stock") have not been paid in an aggregate amount equal to at
least six quarterly dividends on such shares (whether or not consecutive), the
number of directors of the Company will be increased by two (or by the greater
number described below) and the holders of the $17.00 Preferred Stock voting
separately as a class with the holders of such Parity Dividend Stock, if so
provided by the terms of such stock, will be entitled to elect such two
additional directors or such greater number of directors which would result in
such holders electing at least 20% of the Company's Board of Directors at any
meeting of stockholders of the Company at which directors are to be elected
during the period such dividends remain in arrears. Such voting right will
terminate when all such dividends accrued and in default on the $17.00 Preferred
Stock have been paid in full. The term of office of all directors so elected
will terminate immediately upon such payment. Whenever the foregoing right to
elect directors shall be exercised and subsequently terminated upon payment of
dividends in arrears, such right shall again accrue if the Company subsequently
fails to pay dividends on the $17.00 Preferred Stock or any other Parity
Dividend Stock in an amount equal to at least six quarterly dividends (whether
or not consecutive).

The Board determined not to declare and pay the quarterly
dividend of $0.425 per Preferred Share payable July 1, 1992, which dividend has
accumulated. Since the Company has failed to pay dividends on the $17.00
Preferred Stock for six or more quarterly payment periods, pursuant to the
voting provisions described above, the holders of the $17.00 Preferred Stock
elected two directors to the Board.

<PAGE>

Optional Redemption by the Company

The $17.00 Preferred Stock is redeemable, in whole or in part,
at the option of the Company, at the redemption prices per share set forth in
the Certificate of Designations, plus accrued and unpaid dividends to the date
fixed for redemption. Unless full cumulative dividends on all outstanding shares
of $17.00 Preferred Stock have been or contemporaneously are declared and paid
for all past dividend periods, the Company may not (i) redeem fewer than all
shares of the $17.00 Preferred Stock without the affirmative vote or consent of
the holders of at least a majority of the outstanding shares of the $17.00
Preferred Stock voting as a class or (ii) purchase or otherwise acquire (except
by redemption as set forth above) fewer than all shares of the $17.00 Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of the $17.00 Preferred Stock.

Change in Control Option

At any time following the occurrence of a Change in Control
(as defined in the Certificate of Designations) which occurs prior to October 1,
2014, each holder of $17.00 Preferred Stock shall have the right, at the
holder's option, to cause the Company to exchange all or a portion or such
holder's $17.00 Preferred Stock on the date that is 35 business days (subject to
extension) after the Change in Control has occurred (the "Reset Exchange Date"),
for a principal amount of the Company's Subordinated Debentures due October 1,
2014 equal to the liquidation preference of the $17.00 Preferred Stock so
exchanged plus a cash payment of accrued and unpaid dividends, if any, to the
Reset Exchange Date.

Exchange for Convertible Debentures

The entire issue of $17.00 Preferred Stock is exchangeable at
the option of the Company, in whole but not in part, on any dividend payment
date through October 1, 2014, into the Company's 8 1/2% Convertible Subordinated
Debentures due October 1, 2014 (the "Convertible Debentures"). The Convertible
Debentures will be unsecured, subordinated general obligations of the Company,
limited to an aggregate principal amount equal to the aggregate liquidation
value (excluding accrued and unpaid dividends payable upon such exchange) of the
$17.00 Preferred Stock for which the Convertible Debentures are exchanged, and
will mature on October 1, 2014. Holders of the $17.00 Preferred Stock will be
entitled to receive $200.00 principal amount of the Convertible Debentures in
exchange for each share of $17.00 Preferred Stock held by them at the time of
exchange and a cash payment of accrued and unpaid dividends to the date of
exchange.

Restricted Payments

So long as any shares of $17.00 Preferred Stock are
outstanding, the Company will not (i) declare or pay any dividend or make any
distribution in respect of its Common Stock or any other class of capital stock
of the Company ranking junior to the $17.00 Preferred Stock (other than a
dividend or distribution payable in shares of Common Stock or other capital
stock of the Company which is junior to the $17.00 Preferred Stock or rights,
warrants or options to purchase Common Stock or such other capital stock) or
(ii) make any payment on account of the purchase, redemption or other
acquisition or retirement of any Common Stock or any other class of capital
stock of the Company ranking junior to the $17.00 Preferred Stock or rights,
options or warrants to purchase Common Stock or any other class of capital stock
of the Company ranking junior to the $17.00 Preferred Stock or permit any
subsidiary to do so (other

<PAGE>

than payments made in shares of Common Stock or capital stock of the Company
ranking junior to the $17.00 Preferred Stock or payments made in rights,
warrants or options to purchase Common Stock or such other capital stock) if,
after giving effect to (i) and (ii) above, the aggregate amount of all such
dividends, distributions and payments (the amount of any such non-cash payments
to be determined by the Board, whose determination shall be conclusive) declared
or made after the issuance of the $17.00 Preferred Stock exceeds the sum of (a)
the aggregate net proceeds, including the fair market value of non-cash property
(as determined by the Board, whose determination shall be conclusive) received
by the Company from the issuance or sale after March 31, 1989 of shares of its
capital stock (excluding the shares of $17.00 Preferred Stock) or of rights,
warrants or options to purchase or acquire any such capital stock, plus (b) the
aggregate amount of any indebtedness of the Company which is converted into
shares of capital stock subsequent to March 31, 1989 (other than conversion of
Convertible Debentures), plus (c) 50% of the Consolidated Net Income of the
Company measured on a cumulative basis subsequent to March 31, 1989 plus (d) in
the case of any purchase, redemption or other acquisition or retirement referred
to in (ii) above, $10,000,000 (such $10,000,000 being hereinafter referred to as
the "Minimum Additional Repurchase Basket") subject to adjustment as set forth
in the next sentence. An amount equal to the aggregate amount of all net after
tax gains realized from the sale of assets not in the ordinary course of the
Company's business shall accrue and be added to the Minimum Additional
Repurchase Basket at the annual rate of 20% of such realized net gains in each
of the first five years commencing with the fiscal year in which such assets
were sold; provided, however, that the Company may not effect any acquisition
referred to in (ii) above from the amounts added to the Minimum Additional
Repurchase Basket as provided in this sentence if, after giving effect to such
acquisition, the common equity of the Company is less than $31,066,000. The
foregoing provisions shall not prevent (1) the payment of any dividend within 60
days after the date of declaration thereof if at the time of declaration the
declaration complied with the provisions described above or (2) the retirement
of any shares of any class of the Company's capital stock in exchange for
(including any such exchange pursuant to which cash in an aggregate amount of
less than $100,000 is paid in lieu of fractional shares) or out of the
substantially concurrent sale of, other shares of its capital stock, and no such
retirement or the proceeds of any such sale or exchange shall be included in the
computation described above. "Consolidated Net Income" shall mean 100% of the
consolidated net income (exclusive of the gains on the sale of assets not in the
ordinary course of business) minus 100% of the consolidated net loss of the
Company and its subsidiaries from continuing operations as determined in
accordance with generally accepted accounting principles.

Transfer Agent

Chemical Mellon Shareholder Services, L.L.C., 85 Challenger
Road, Ridgefield Park, New Jersey, is the transfer agent for the $17.00
Preferred Stock.

Preferred Shares

Each Preferred Share represents 1/10th of a share of $17.00
Preferred Stock deposited under the Deposit Agreement (the "Deposit Agreement")
among the Company, the Depositary and the holders from time to time of the
depositary receipts issued thereunder, evidencing the Preferred Shares. Subject
to the terms of the Deposit Agreement, each owner of a Preferred Share is
entitled, proportionally, to all of the rights and preferences of the $17.00
Preferred Stock (including dividend, conversion, redemption, exchange,
liquidation and voting rights) contained in the Certificate and the Certificate
of

<PAGE>

Designations and summarized under "Description of Securities--Preferred
Stock--$17.00 Preferred Stock." The Preferred Shares are not a separate class of
stock of the Company.

CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS

General

In 1987, the Company reincorporated in Delaware. In connection
with the reincorporation, the Certificate and By-Laws were amended. The
Certificate and the By-Laws of the Company contain several provisions that will
make difficult the acquisition of control of the Company by means of a tender
offer, open market purchases, proxy fight or otherwise. These provisions are
expected to discourage certain types of coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
the Company first to negotiate with the Company. The Company believes that the
benefits of increased protection of the Company's potential ability to negotiate
with the proponent of an unfriendly or unsolicited proposal to take over or
restructure the Company outweigh the disadvantages of discouraging such
proposals because, among other things, negotiation of such proposals could
result in an improvement of their terms.

Set forth below is a summary of certain provisions in the
Certificate and the By-Laws. The description is intended as a summary only and
is qualified in its entirety by reference to the Certificate and the By-Laws.

Board of Directors

The Certificate and the By-Laws provide for a Board divided
into three classes of directors serving staggered three-year terms. With respect
to the present Board, the term of the first class of directors will expire at
the 1997 annual meeting of stockholders, the term of the second class of
directors will expire at the 1996 annual meeting of stockholders and the term of
the third class of directors will expire at the 1998 annual meeting of
stockholders. The Certificate and the By-Laws provide that the number of
directors will be fixed from time to time exclusively by the Board, and a
majority of the Board then in office may fill any vacancies on the Board. These
rights would be subject to the voting rights of holders of the $17.00 Preferred
Stock or any other issue of preferred stock of the Company. The Certificate also
provides that, subject to the rights of the holders of preferred stock of the
Company, directors may be removed only for cause and only by the affirmative
vote of holders of at least 80% of the voting power of the Company ("Voting
Stock"), voting together as a single class.

Stockholder Actions and Special Meetings

The Certificate provides that stockholder action can be taken
only at an annual or special meeting of stockholders and prohibits stockholder
action by written consent in lieu of a meeting. The Certificate and the By-Laws
provide that, subject to the rights of holders of any series of preferred stock,
special meetings of stockholders can be called only by the Board, the Chairman
of the Board, the President of the Company or a committee of the Board whose
power and authority include the power to call such a meeting or at the request
of a majority of the Board. Subject to the rights of holders of any series of
preferred stock, stockholders are not permitted to call a special meeting or to
require that the Board call a special meeting of stockholders.

<PAGE>

The By-Laws establish an advance notice procedure with regard
to business introduced by a stockholder to be brought before an annual meeting
of stockholders of the Company which is not specified in the notice of annual
meeting. In addition, pursuant to the Certificate, the By-Laws establish an
advance notice procedure with regard to nominations for the election of
directors by a stockholder.

The Certificate requires the vote of not less than 80% of the
Voting Stock to approve certain business combinations with any person which
beneficially owns at least 25% or more of the outstanding Voting Stock of the
Company (a "Related Person") unless (1) the directors of the Company by a
two-thirds vote of all directors in office have approved in advance the
acquisition of Voting Stock that caused the Related Person to become a Related
Person or have approved the business combination or (2) such Related Person has
been a Related Person for at least three years prior to the business
combination.

Amendment of Certain Provisions of the Certificate and By-Laws

Subject to the voting rights of holders of the $17.00
Preferred Stock or any other issue of preferred stock of the Company, the
Certificate and the By-Laws contain provisions requiring the affirmative vote of
the holders of at least 80% of the Voting Stock to amend certain provisions of
the Certificate and certain provisions of the By-Laws relating to the classified
board, fixing the number of directors, removal of directors, filling vacancies
on the Board, requiring that any stockholder action be taken only at an annual
or special meeting of stockholders and prohibiting the calling of special
meetings by stockholders.

Section 203 of the Delaware General Corporation Law

The Company is subject to the provisions of Section 203 of the
Delaware General Corporation Law ("DGCL"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or affiliate or associate of such person
who is an "interested stockholder" for a period of three years from the date
such person became an interested stockholder unless: (i) the transaction
resulting in a person's becoming an interested stockholder, or the business
combination, is approved by the board of directors of the corporation before the
person becomes an interested stockholder; (ii) the interested stockholder
acquires 85% or more of the outstanding voting stock of the corporation in the
same transaction which makes it an interested stockholder (excluding certain
employee stock option plans); or (iii) on or after the date the person becomes
an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (x) the owner of 15% or more of
the outstanding voting stock of the corporation or (y) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.

Directors' Liability

The Certificate contains provisions to (i) eliminate the
personal liability of its directors for monetary damages resulting from breaches
of their fiduciary duty (other than breaches of the duty of loyalty, acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, violations under Section 174 of the DGCL or for any
transaction from which the director derived

<PAGE>

an improper personal benefit) and (ii) indemnify its directors and officers to
the fullest extent permitted by Section 145 of the DGCL, including circumstances
in which indemnification is otherwise discretionary. Insofar as indemnification
for liabilities arising under the Securities Act may be permitted to directors,
officers and controlling persons of the Company, the Company has been advised
that, in the opinion of the Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore , unenforceable. The
Company believes that these provisions are necessary to attract and retain
qualified persons as directors and officers.

TRANSFER AGENT AND REGISTRAR

Continental Stock Transfer & Trust Company, 2 Broadway, New
York, New York is the transfer agent and registrar for the Common Stock.

LEGAL MATTERS

The validity, authorization and issuance of the Common Stock offered hereby
will be passed upon for the Company by Shereff, Friedman, Hoffman & Goodman,
LLP, New York, New York. Mr. Nussbaum, a director of the Company, is a partner
in the firm of Shereff, Friedman, Hoffman & Goodman, LLP. Mr. Nussbaum
beneficially owns 9,473 shares of Common Stock of the Company. Certain partners
and former partners of Shereff, Friedman, Hoffman & Goodman, LLP, other than Mr.
Nussbaum, are Selling Stockholders in this Offering. See "Selling Stockholders."

EXPERTS

The consolidated financial statements as of December 31, 1995
and 1994 and for each of the three years in the period ended December 31, 1995
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of
the Exchange Act and in accordance therewith, files reports, proxy statements
and other information with the Commission. These reports, proxy statements and
other information filed by the Company can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024 of the
Commission's office at 450 Fifth Street N.W., Washington, D.C. 20549, and at its
regional offices located at Suite 1400, Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60661 and at Suite 1300, Seven World Trade
Center, New York, New York 10048. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Company's Common Stock is listed
on the New York Stock Exchange and copies of reports, proxy statements and other
information concerning the Company can be inspected at the offices of the New
York Stock Exchange at 20 Broad Street, New York, New York 10005.

<PAGE>

The Company has filed with the Commission a Registration
Statement on Form S-1 and schedules and exhibits thereto under the Act with
respect to the Common Stock offered hereby. This Prospectus, which constitutes a
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain portions of which are omitted in accordance with the rules and
regulations of the Commission. Statements made in this Prospectus as to the
contents of any contract, agreement, or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed with the Commission as an exhibit to the Registration Statement,
reference is made to the copy of such contract, agreement or document filed as
an exhibit to the Registration Statement for more complete description of the
matter involved, and each such statement be deemed qualified in its entirety by
such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement
and the exhibits and schedules thereto.

<PAGE>

Index to Financial Statements:

Financial Statements Page
- -------------------- ----

Report of Independent Accountants F-2

Consolidated Financial Statements:

Consolidated Balance Sheets - December 31, 1995
and December 31, 1994 F-3

Consolidated Statements of Operations for the years
ended December 31, 1995, 1994 and 1993 F-4

Consolidated Statements of Changes in Shareholders'
Equity for the years ended
December 31, 1995, 1994 and 1993 F-5

Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1994 and 1993 F-6

Notes to Consolidated Financial Statements F-7 to F-21

Financial Statements Schedules Page
- ------------------------------ ----

Schedule VIII--Valuation and Qualifying Accounts
and Reserves for the years ended December 31, 1995,
1994 and 1993 S-1

Schedule X--Supplementary Income Statement
Information for the years ended December 31, 1995,
1994 and 1993 S-2

F-1

<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of Lewis Galoob Toys, Inc.

In our opinion, the consolidated financial statements listed in the accompanying
Index to Financial Statements present fairly, in all material respects, the
financial position of Lewis Galoob Toys, Inc. and its subsidiaries at December
31, 1995 and 1994, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

San Francisco, California
February 8, 1996 (except as to Note R, which is as of February 12, 1996)

F-2

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)

December 31,
------------
1995 1994
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................... $ 2,030 $ 2,225
Accounts receivable, net ........................... 68,402 57,883
Inventories ........................................ 17,491 16,824
Tooling and related costs .......................... 8,311 8,379
Prepaid expenses and other assets .................. 10,348 5,492
--------- ---------
TOTAL CURRENT ASSETS ........................... 106,582 90,803
LAND, BUILDING AND EQUIPMENT, NET ..................... 8,913 8,400
OTHER ASSETS .......................................... 4,589 1,563
--------- ---------
$ 120,084 $ 100,766
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ...................................... $ 15,071 $ 6,971
Accounts payable ................................... 17,141 14,973
Accrued expenses ................................... 14,547 14,939
Income taxes payable ............................... 731 499
Current portion of long-term debt .................. 4,422 202
--------- ---------
TOTAL CURRENT LIABILITIES ...................... $ 51,912 $ 37,584
LONG-TERM DEBT ........................................ 14,000 18,414
SHAREHOLDERS' EQUITY:
Preferred stock
Authorized 1,000,000 shares
Issued and outstanding 183,950 shares of $17
Convertible Exchangeable Preferred Stock at
$200 liquidation value per share 36,790 36,790
Common Stock, par value $.01 per share
Authorized 50,000,000 shares
Issued and outstanding 10,089,961 shares in 1995 and
10,055,089 shares in 1994 ....................... 101 101
Additional paid-in capital ......................... 31,579 31,506
Retained earnings (deficit) ........................ (13,851) (23,182)
Cumulative translation adjustment .................. (447) (447)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY ..................... 54,172 44,768
--------- ---------
$ 120,084 $ 100,766
========= =========

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-3

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

Years ended December 31,
------------------------
1995 1994 1993
-------- --------- ----------
Net revenues ........................... $220,044 $ 178,792 $ 134,334
Costs of products sold ................. 132,061 104,592 82,875
------- --------- -----------
Gross margin ........................... 87,983 74,200 51,459
-------- --------- -----------
Operating expenses:
Advertising and promotion ........... 31,240 30,616 23,537
Other selling and administrative .... 35,868 26,974 25,640
Research and development ........... 7,886 7,288 7,451
Variable stock option plan expense .. -- -- 4,046
------- --------- -----------
Total operating expenses ............... 74,994 64,878 60,674
------- --------- -----------
Earnings (loss) from operations ........ 12,989 9,322 (9,215)
Net proceeds from Nintendo award ....... -- 12,124 --
Interest expense ....................... (3,429) (2,609) (1,836)
Other income, net ...................... 439 365 136
--------- --------- ----------
Earnings (loss) before income taxes .... 9,999 19,202 (10,915)
Provision for income taxes ............. 600 778 9
-------- --------- -----------
Net earnings (loss) .................... 9,399 18,424 (10,924)
Preferred stock dividends in arrears ... 3,127 3,127 3,127
-------- --------- -----------
Net earnings (loss) applicable to
common shares .................... $ 6,272 $ 15,297 $ (14,051)
========= ========= ===========
Common shares and common share
equivalents outstanding -average .. 10,451 10,111 9,548
Net earnings (loss) per common share:
Primary ........................... $ 0.60 $ 1.51 $ (1.47)
Fully Diluted ...................... 0.60 1.41 (1.47)

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-4

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in thousands, except shares)

<TABLE>
<CAPTION>
Preferred Stock Common Stock
-------------------- -------------------
Shares Amts Shares Amts
------ ---- ------ -------
<S> <C> <C> <C> <C>
Balance at 12/31/92 183,950 $ 36,790 9,472,057 $ 95

Net loss -- -- -- --
Common stock issued -- -- 89,800 1
Warrants issued -- -- -- --
Common stock received in exchange
for shares issued and cancelled -- -- (2,500) --
Cumulative translation adj. and other -- -- -- --
----------- ----------- ----------- -----------
Balance at 12/31/93 183,950 36,790 9,559,357 96

Net earnings -- -- -- --
Common stock issued, net -- -- 47,000 1
Termination of 1992 Plan -- -- 449,732 4
Common stock received in exchange --
for shares issued and cancelled -- -- (1,000) --
Cumulative translation adj. and other -- -- -- --
----------- ----------- ----------- -----------
Balance at 12/31/94 183,950 36,790 10,055,089 101

Net earnings -- -- -- --
Common stock issued, net -- -- 58,751 --
Common stock received in exchange for
shares issued and cancelled -- -- (11,202) --
Reclamation of shares -- -- (12,677) --
----------- ----------- ----------- -----------
Balance at 12/31/95 183,950 $ 36,790 10,089,961 $ 101
=========== =========== =========== ===========
</TABLE>

(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Additional Retained Cumulative
Paid-In Earnings Translation
Capital (Deficit) Adjustment Total
------- ------- ---------- -----
<S> <C> <C> <C> <C>
Balance at 12/31/92 $ 26,425 $ (30,652) $ (412) $ 32,246
Net loss -- (10,924) -- (10,924)
Common stock issued 343 -- -- 344
Warrants issued 525 -- -- 525
Common stock received in exchange
for shares issued and cancelled -- (20) -- (20)
Cumulative translation adj. and other -- -- (9) (9)
----------- ----------- ----------- -----------
Balance at 12/31/93 27,293 (41,596) (421) 22,162

Net earnings -- 18,424 -- 18,424
Common stock issued, net 161 -- -- 162
Termination of 1992 Plan 4,042 -- -- 4,046
Common stock received in exchange
for shares issued and cancelled 10 (10) -- --
Cumulative translation adj. and other -- -- (26) (26)
----------- ----------- ----------- -----------
Balance at 12/31/94 31,506 (23,182) (447) 44,768

Net earnings -- 9,399 -- 9,399
Common stock issued, net 228 -- -- 228
Common stock received in exchange for
shares issued and cancelled (155) (68) -- (223)
Reclamation of shares -- -- -- --
----------- ----------- ----------- -----------
Balance at 12/31/95 $ 31,579 $ (13,851) $ (447) $ 54,172
=========== =========== =========== ===========

</TABLE>

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-5

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except shares)

Years ended December 31,
1995 1994 1993
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss) ................ $ 9,399 $ 18,424 $(10,924)
Adjustments to reconcile net earnings
(loss) to net cash used in
operating activities:
Depreciation ................. 528 628 682
Variable stock option plan accrual -- -- 4,046
Changes in assets and liabilities:
Accounts receivable ........ (10,519) (24,500) 2,523
Inventories ................ (667) (3,845) 691
Tooling and related costs .. 68 (3,359) (2,212)
Prepaid expenses and other
current assets ............ (4,856) 1,849 285
Accounts payable ........... 2,168 4,140 1,449
Accrued expenses ........... (392) 67 (3,002)
Income taxes payable ....... 232 217 (549)
Other assets ............... (3,026) (168) (437)
-------- -------- --------
Net cash (used in) provided by
operating activities ........ (7,065) (6,547) (7,448)
-------- -------- --------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in land, building and
equipment, net ................... (1,041) (466) (82)
-------- -------- --------
Net cash (used in) provided by
investing activities .......... (1,041) (466) (82)
-------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under
notes payable .................. 8,100 6,971 (5,698)
Borrowings under long-term debt
agreement ...................... -- -- 14,000
Repayments under long-term debt
agreements ..................... (194) (194) (191)
Proceeds from issuance of common
stock, net ...................... 5 162 324
Other, net ........................ -- (26) (9)
-------- -------- --------
Net cash provided by (used in)
financing activities ........ 7,911 6,913 8,426
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................... (195) (100) 896
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR ............................. 2,225 2,325 1,429
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,030 $ 2,225 $ 2,325
======== ======== ========

Supplemental disclosure of non-cash activity:
In 1994, the Company issued 449,732 shares of common stock in connection
with the termination of the 1992 Senior Management Stock Option Plan.
(See Note O)

Supplemental disclosure of cash flow information:

Cash paid for interest ............. $ 3,050 $ 2,656 $ 1,604
Cash paid for income taxes ......... $ 390 $ 822 $ 574

The accompanying notes are an integral part of these Consolidated Financial
Statements.

F-6

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years ended December 31, 1995, 1994 and 1993

NOTE A - Summary of Significant Accounting Policies

Organization and Business

The Company has been engaged in business since 1957 and was originally
incorporated in California on November 6, 1968 and reincorporated in Delaware on
August 28, 1987. The Company is engaged in the design, development, marketing
and distribution of high quality toys worldwide. The Company's products are
primarily manufactured in the People's Republic of China ("China").

Consolidation

The consolidated financial statements include the accounts of the Company and
its subsidiaries, principally Galco International Toys, N.V. ("Galco"). All
significant intercompany accounts have been eliminated in consolidation. Certain
amounts in the financial statements of prior years have been reclassified to
conform with the current year's presentation.

Revenue Recognition

The Company records a transaction as a sale when inventory is shipped to the
customer and title passes. The Company provides for returns using a percentage
of gross sales, based on historical experience.

Foreign Currency Translation

The financial statements of Galco have been translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 52,
Foreign Currency Translation. All asset and liability accounts have been
translated using rates of exchange in effect at the balance sheet date. Revenues
and expenses are translated at the weighted average of exchange rates in effect
during the year. Gains or losses from foreign currency translation adjustments
are charged or credited directly to a separate component of shareholders'
equity.

Use of Estimates

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash equivalents consist primarily of marketable securities with original
maturities of less than ninety days.

Concentration of Credit Risk

Accounts receivable primarily represent balances due from customers. The Company
performs credit evaluations of each of its customers and maintains allowances
for potential credit losses. Such losses have generally been within management's
expectations.

F-7

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

Inventories

Inventories are stated at lower of cost (first-in, first-out) or market.

Tooling and Related Costs

Costs incurred for tooling and package design are deferred and amortized over
the life of the products, which range from one to two years.

Prepaid Expenses

Prepaid expenses include costs such as those incurred in the creation of
television commercials which are deferred and amortized over their lives which
is estimated to be one year or the period the commercial is used, if shorter. On
January 1, 1995, the Company implemented SOP 93-7 "Reporting on Advertising
Costs." Implementation of the new standard had no material impact on the
financial statements. Prepaid expenses also include prepaid insurance, prepaid
samples, prepaid advertising media, and royalty advances.

Land, Building and Equipment

Land, building and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the respective
assets. Amortization of leasehold improvements is provided using the
straight-line method over the estimated useful lives of the assets, or the term
of the applicable lease, whichever is less. Estimated useful lives are 35 years
for building and building improvements, 1 to 12 years for leasehold
improvements, 5 years for office furniture, fixtures and equipment (including
computer equipment), and 3 to 6 years for vehicles.

For the year ended December 31, 1995, the Company implemented SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets". Implementation of SFAS
No. 121 has been determined to have no material impact on the financial
statements.

Income Taxes

In 1993, the Company retroactively adopted SFAS 109, "Accounting for Income
Taxes". SFAS 109 prescribes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the Company's financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of changes
in the tax law or rates. Previously, the Company used the SFAS 96 asset and
liability approach that gave no recognition to future events other than the
recovery of assets and settlement of liabilities at their carrying amounts.
Adoption of SFAS 109 did not have a material effect on the financial statements.

Earnings Per Share

Primary earnings per share is based on the net earnings (loss) applicable to
common shares, after providing for the dividends in arrears on the preferred
stock, for the year divided by the weighted average number of common and common
equivalent shares outstanding. Primary earnings per share for the years ended
December 31, 1995 and 1994 have been adjusted by common equivalent shares
resulting from the assumed

F-8

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

exercise of common stock options and stock warrants. Primary earnings per share
for the year ended 1993 has not been adjusted by common equivalent shares since
the effect would be anti-dilutive. Fully diluted earnings per share for the year
ended 1994 includes the effect of the assumed conversion of the $17 Convertible
Exchangeable Preferred Stock and the 8% Convertible Subordinated Debentures into
common stock. Fully diluted earnings per share for the years ended December 31,
1995 and 1993 were the same as primary earnings per share since the effect of
the assumed conversion is anti-dilutive.

Recent Accounting Pronouncement

In 1995, the FASB issued a new standard, SFAS No. 123, "Accounting for
Stock-Based Compensation", which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation cost
at the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, the standard permits entities to continue accounting for employee
stock options and similar equity instruments under APB Opinion 25, "Accounting
for Stock Issued to Employees". Entities that continue to account for stock
options using APB Opinion 25 are required to make pro forma disclosures of net
income and earnings per share, as if the fair value-based method of accounting
defined in SFAS No. 123 had been applied. The Company has not determined which
method it will follow in the future. The Company will be required to adopt the
new standard for the year ending December 31, 1996.

NOTE B - Accounts Receivable, Net

(in thousands)
December 31,
------------
1995 1994
---- ----
Trade receivables ........................... $ 76,834 $ 65,757
Provisions for:
Advertising allowances ................... (5,800) (2,900)
Return of defective goods ................ (700) (900)
Markdowns and discounts .................. (2,975) (3,400)
Doubtful accounts ........................ (507) (897)
-------- --------
Net trade receivables ............... 66,852 57,660
Other receivables ........................... 1,550 223
-------- --------
$ 68,402 $ 57,883
======== ========

NOTE C - Inventories

(in thousands)
December 31,
------------
1995 1994
-------- --------
Finished goods .............................. $ 17,023 $ 15,596
Raw materials and parts ..................... 468 1,228
-------- --------
$ 17,491 $ 16,824
======== ========

F-9

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE D - Land, Building and Equipment, Net

(in thousands)
December 31,
------------
1995 1994
------- -------
Land and building .......................... $ 9,567 $ 9,564
Office furniture, fixtures and
equipment ................................. 4,646 4,360
Leasehold improvements ..................... 1,267 787
Vehicles ................................... 104 104
------- -------
15,584 14,815
Less accumulated depreciation .............. 6,671 6,415
------- -------
$ 8,913 $ 8,400
======= =======

NOTE E - Notes Payable

On March 31, 1995, the Company entered into an amended and restated loan and
security agreement (the "New Agreement") with Congress Financial Corporation
(Central) (the "Lender"). The New Agreement extends through March 31, 1997 and
provides a line of credit of $40 million, with provision to increase the line to
$60 million at the option of the Company. Borrowing availability is determined
by a formula based on qualified assets. The interest is at prime rate plus 1%.
In consideration for entering into the New Agreement, the Company paid a
$100,000 fee; additional fees will be paid if the Company exercises its option
to increase the line. The Company has also agreed to pay an unused line fee of
0.25% and certain management fees. The New Agreement provides that the preferred
dividend payment may not be made without the prior consent of the Lender. The
deferred loan fee is included in other assets and is being amortized using a
straight-line method over the term of the loan.

The maximum outstanding borrowings, average outstanding balances and weighted
average rates of interest for notes payable were as follows:

(in thousands)
1995 1994
---- ----

Maximum outstanding at month end .......... $30,235 $18,209

Average outstanding amount during the year 14,211 4,184
Weighted average interest rate for the year 10.4% 11.2%

F-10

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE F - Income Taxes

Earnings (loss) before income taxes and the provision for income taxes are as
follows:

(in thousands)
Years ended December 31,
-----------------------
1995 1994 1993
---- ---- ----
Earnings (loss) before income taxes:
Domestic ...................... $ 9,288 $ 18,861 $(10,806)
Foreign ....................... 711 341 (109)
-------- -------- --------
$ 9,999 $ 19,202 $(10,915)
======== ======== ========
Provision for income taxes:
Current:
Federal ....................... $ 187 $ 490 $ --
State ......................... 278 201 --
Foreign ....................... 135 87 9
-------- -------- --------
600 778 9
Deferred:
Federal ....................... -- -- --
State ......................... -- -- --
Foreign ....................... -- -- --
-------- -------- --------
$ 600 $ 778 $ 9
======== ======== ========

Deferred tax liabilities (assets) consist of the following:

(in thousands)
Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----

Prepaid expenses ...................... $ 2,475 $ 1,586 $ 2,065
Other temporary differences ........... 766 705 647
-------- -------- --------

Gross deferred tax liabilities ........ 3,241 2,291 2,712
-------- -------- --------

Accrued expenses ...................... (613) (939) (1,377)
Defectives provision .................. (245) (315) (560)
Other temporary differences ........... (3,244) (2,970) (1,936)

Net operating loss carryforwards ...... (2,567) (4,037) (11,128)
Research and development tax credit ... (765) (765) (765)
carryforward
Other ................................. (1,027) (944) (765)
-------- -------- --------
Gross deferred tax assets ............. (8,461) (9,970) (16,531)
-------- -------- --------
Deferred tax assets valuation allowance 5,220 7,679 13,819
-------- -------- --------
$ - - -
======== ======== ========

F-11

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

A deferred tax valuation allowance has been recorded for the net operating loss
carryforwards and other credits which may not be utilized. The net change in the
valuation allowance for deferred tax assets was an increase (decrease) of
($2,459,000), ($6,140,000) and $1,648,000 in 1995, 1994 and 1993, respectively.

At December 31, 1995, the Company had federal net operating loss carryforwards
for income tax purposes of approximately $7,300,000. The carryforwards expire in
different years through the year 2008. The Company also has federal minimum tax
credit carryforwards of $1,028,000 that are allowed to be carried forward
indefinitely and federal research and development credits of $765,000, which
will expire in different years through the year 2003. If certain substantial
changes in the Company's ownership should occur, there would be an annual
limitation on the amount of operating loss carryforwards which can be utilized.

The provision for income taxes differs from the provisions determined by
applying the applicable U.S. statutory federal income tax rates to pretax income
as a result of the following differences:

Years ended December 31,
------------------------
1995 1994 1993
---- ---- ----
Federal income taxes (benefit)
at the U.S. statutory rate ............... 35.0% 35.0% (34.0%)

Increase (decrease) in income taxes resulting from:
Effects of U.S. and foreign income
taxes on foreign operations ............. (1.1) (0.2) 0.1

State income taxes, net of loss
carryforwards, less federal tax benefits 2.8 0.9 --

Benefit of reversing temporary differences
for which benefits were not previously
recorded ............................... (20.9) -- --

Loss carryback/carryforward ........ (13.8) (31.6) 34.0

Other .................................. 4.0 -- --
---- ---- ----
6.0% 4.1% 0.1%
==== ==== ====

During 1993, the Company settled with the Internal Revenue Service ("IRS") and
the California Franchise Tax Board ("CFTB") regarding audits of the years 1982
through 1990 for federal purposes and 1983 through 1989 for California purposes.
The Company adequately provided for the amounts settled with the IRS and the
CFTB.

No domestic deferred taxes have been provided on unremitted earnings of the
foreign subsidiary. All such earnings are expected to be reinvested in the
subsidiary. Undistributed earnings for which the Company has not provided taxes,
which may be payable on distribution, were approximately $5,200,000 as of
December 31, 1995. No foreign taxes will be withheld on the distribution of the
untaxed earnings.

F-12

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE G - Leases

The Company leases its domestic warehouse and showroom facilities, and its
facilities in Hong Kong. The leases have been classified as operating leases and
are for terms expiring at various dates through 2000. Under the terms of the
facility leases, rents are adjusted annually for changes in the consumer price
index and increases in property taxes. The Company has a lease option on the
domestic warehouse to renew for one five-year term.

Future minimum lease payments for all noncancellable operating leases as of
December 31, 1995 (in thousands) are as follows:

Years ending December 31,

1996 $ 972
1997 869
1998 772
1999 636
2000 323
--------
$3,572

Net rental expense for the years ended December 31, 1995, 1994 and 1993 was
$1,988,164, $1,515,000 and $1,449,000, respectively.

NOTE H - Royalty Contracts

The Company has future minimum royalty guarantee payments as of December 31,
1995 (in thousands) as follows:

Years ending December 31,

1996 $ 3,067
1997 1,915
1998 340
1999 500
--------

$5,822

NOTE I - Accrued Expenses

(in thousands)
December 31,
------------
1995 1994
---- ----
Accrued advertising .............................. $ -- $ 272
Accrued royalties ................................ 6,003 6,039
Accrued compensation and commissions ............. 4,814 3,875
Accrued freight and duty ......................... 495 1,483
Accrued interest ................................. 1,139 1,108
Accrued inventory purchase commitments ........... 1,450 1,320
Other accrued expenses ........................... 646 842
------- -------
$14,547 $14,939
======= =======

During 1995, the Company settled with the United States Customs Service
("Customs") regarding the audit of duty due on importations of goods into the
United States of the years 1988 through 1991. The Company adequately provided
for the amount settled with Customs.

F-13

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE J - Long-Term Debt

(in thousands)
December 31,
1995 1994
---- ----
8% Convertible Subordinated Debentures
due and payable on November 30, 2000,
interest paid semi-annually ............ $14,000 $14,000
Mortgage secured by headquarters land
and building, payable in monthly
installments of $55,314 (principal and
interest) through November 30, 1996
when the remaining outstanding balance
is due, interest rate 10.3% ............ 4,422 4,616
------- -------
18,422 18,616
Current portion ............................. 4,422 202
------- -------
$14,000 $18,414
======= =======

On November 17, 1993, the Company issued in a private placement $14 million in
principal amount of 8% Convertible Subordinated Debentures (the "8%
Debentures"), at par. The interest is to be paid semi-annually. The 8%
Debentures mature on November 30, 2000 and are convertible into shares of the
Company's common stock at $9.26 calculated based upon 115% of the average of the
Company's closing common stock price for the ten business days ending November
12, 1993. In connection with the 8% Debentures, the Company paid a commission to
its investment bankers of $560,000 and issued warrants for 150,000 shares, which
were valued at $525,000 and recorded as additional paid-in capital. These
deferred loan costs are included in other assets and are amortized using a
straight-line method over the term of the loan. (See Note R.)

NOTE K - Major Customers

The Company had transactions with one customer, Toys "R" Us, Inc. that accounted
for approximately 20% of net revenues in 1995 and 21% of net revenue in 1994 and
1993, respectively. Wal-Mart accounted for approximately 11% of net revenues in
1995.

NOTE L - Profit Sharing Plan

The Company has a 401(k) profit sharing plan covering all non-union full-time
employees. The plan is qualified under Section 401(a) of the Internal Revenue
Code so that contributions to the plan by the Company are not taxable until
distributed to employees. Contributions under the plan are at the discretion of
the Board of Directors and are subject to the amounts allowable under applicable
provisions of the Internal Revenue Code. No Company contributions have been made
in 1995, 1994 or 1993.

NOTE M - Litigation

On May 17, 1990, the Company filed a complaint against Nintendo of America, Inc.
("Nintendo") seeking a declaratory judgment and injunctive relief in the United
States District Court, Northern District of California (the "District Court").
This complaint sought confirmation of the Company's right to market, distribute
and sell its Game Genie product. On June 1, 1990, Nintendo filed a complaint in
the same District Court alleging copyright and trademark infringement and
seeking a preliminary and permanent injunction and unspecified damages.

On April 11, 1994, Nintendo paid the Company $16.1 million representing the full
damage award plus interest and related costs. The Company retained approximately
$12.1 million of this amount, and the Company's Game Genie licensors were paid
the remaining $4.0 million. Notwithstanding such payment, on June 20, 1994,
Nintendo filed a petition for a Writ of Certiorari with the United States
Supreme Court, which asked the Supreme Court to review the

F-14

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

damage award on a discretionary basis. On October 3, 1994, the Supreme Court
rejected Nintendo's petition and affirmed Galoob's right to the full damage
award. There is no further basis for appeal by Nintendo.

Nintendo's original trademark claim and the Company's original anti-trust
cross-claim against Nintendo were severed from the copyright claims that were
adjudicated on July 3, 1991. On January 18, 1995 these claims were dismissed
with prejudice by Nintendo and Galoob, respectively. The Nintendo Game Genie
infringement lawsuit is now complete.

The Company is involved in various other litigation and legal matters which are
being defended and handled in the ordinary course of business. None of these
matters is expected to result in outcomes having a material adverse effect on
the Company's consolidated financial position or results of operation.

NOTE N - Shareholders' Equity

In 1989, the Company issued 183,950 authorized shares of $17 Convertible
Exchangeable Preferred Stock with a $200 liquidation value (the "Preferred
Stock") and deposited them with a U.S. Bank (the "Depositary") and sold in a
public offering an aggregate of 1,839,500 Depositary Convertible Exchangeable
Preferred Shares (the "Depositary Shares") at a price of $20 per share. Each
Depositary Share represents 1/10th share of Preferred Stock and has a cumulative
dividend rate of $1.70 per annum, payable quarterly, and may be converted into
common stock at the option of the holders at an initial price of $16.875 per
share of common stock.

The Depositary Shares are redeemable in whole or in part at any time, at the
option of the Company, at redemption prices ranging from $21.36 to $20.00 plus
dividends accrued and unpaid to the redemption date, provided certain redemption
requirements are met which are based on the market price of the Company's common
stock.

The entire issue of Depositary Shares (in multiples of ten) and the entire issue
of Preferred Stock is exchangeable, at the option of the Company, on any
dividend payment date for the Company's 8-1/2% Convertible Subordinated
Debentures due October 1, 2014 (the "8-1/2% Debentures") at the rate of $20.00
principal amount of 8-1/2% Debentures for each Depositary Share. At any time
following the occurrence of certain change in control transactions, each holder
of Depositary Shares, the Preferred Stock, or of 8-1/2% Debentures, as the case
may be, has the right to cause the Company to exchange the Depositary Shares (in
multiples of ten), the Preferred Stock or the 8-1/2% Debentures, as the case may
be, for the Company's Subordinated Debentures due October 1, 2014 (the "Reset
Debentures").

As long as the Preferred Stock, the 8-1/2% Debentures, or the Reset Debentures
are outstanding, the Company will be subject to limitations on the payment of
certain common stock dividends and other distributions and on the purchase,
redemption, or other acquisition of capital stock. No common stock dividends may
be paid unless the Preferred Stock dividends are current. The Company has
reserved 2,180,148 shares of common stock for the conversion of the Preferred
Stock.

On June 10, 1992, the Company announced it would not pay the July 1, 1992 $0.425
per share quarterly dividend on its Depositary Shares which represent shares of
the Company's Preferred Stock. The Company has not paid the subsequent quarterly
dividends. As of January 1, 1996, the dividend was cumulatively fifteen quarters
in arrears, representing a total dividend arrearage of $11.7 million. By the
terms of the Certificate of Designations for the Company's Preferred Stock, the
Company is not legally obligated to pay any such arrearage. The Company has
consistently maintained that it is not in its best interest to reinstate the
dividend until the Company has generated consistent net income from operations
and continuation of such profitability can be reasonably expected. Based upon
recent results, the Company has been evaluating its alternatives with regard to
the Preferred Stock. The net earnings (loss) per share calculation includes a
provision for the Preferred Stock dividends in arrears. No common stock
dividends may be paid unless all Preferred Stock dividend payments are current.
As a result of the cumulative dividend being six or more quarters in arrears, on
July 15, 1994 the holders of the Preferred Stock exercised their right to elect
two directors. (See Note R.)

In 1990, the Company adopted a Stockholder Rights Plan and declared a dividend
distribution of one Right for each outstanding share of common stock. Each Right
will entitle holders of the Company's common stock to buy one-thousandth of a
share of

F-15

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

Series A Preferred Stock of the Company at an exercise price of $43.00, subject
to adjustment. The Rights will be exercisable only if a person or group acquires
beneficial ownership of 20% or more of the common stock (other than pursuant to
certain transactions involving the Company) (an "Acquiring Person") or announces
a tender or exchange offer that would result in such person or group
beneficially owning 20% or more of the common stock (other than a tender or
exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair).

If any person becomes the beneficial owner of 20% or more of the common stock
(other than pursuant to certain transactions involving the Company or a tender
or exchange offer for all outstanding shares at a price determined by the
non-affiliated directors to be fair), or an Acquiring Person engages in certain
"self-dealing" transactions including a merger in which the Company is the
surviving corporation, each Right not owned by such Acquiring Person will enable
its holder to purchase, at the Right's then-current exercise price, shares of
the common stock (or, in certain circumstances, cash, property or other
securities of the Company) having a value of twice the Right's exercise price.
In addition, if the Company is acquired in a merger or other business
combination transaction in which the Company is not the surviving corporation,
or if the Company sells or transfers 50% or more of its assets or earning power,
each Right not owned by such Acquiring Person will entitle its holder to
purchase, at the Right's then-current exercise price, common shares of the
acquiring company having a value of twice the Right's exercise price.

The Rights will expire January 17, 2000 or they may be redeemed by the Company
at $.01 per share prior to that date. The Rights do not have voting or dividend
rights and, until they become exercisable, have no dilutive effect on the
earnings of the Company.

NOTE O - Stock Options and Warrants

The Board of Directors and the shareholders adopted an Employee Stock Option
Plan in 1984 (the "1984 Plan"). During 1994, the 1984 Plan was amended to extend
the plan until April 20, 2004 and to increase the aggregate number of shares
available under the 1984 Plan. The 1984 Plan authorizes the Board of Directors
to grant to officers and employees of the Company and certain of its
subsidiaries options to purchase up to an aggregate of 1,589,997 common shares.
Stock options are exercisable in accordance with the determination of the Board
of Directors made at the time of their grant, and expire not more than ten years
after the date of grant. Stock options granted under the 1984 Plan in 1995, 1994
and 1993 were at 100% of market price.

As of December 31, 1995, 241,029 shares remain available for future grants.

F-16

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

Stock option activity pursuant to the 1984 Plan is summarized as follows:

1995 1994 1993
-------- -------- -----
Options outstanding:
At January 1 ....... 331,899 275,399 320,608
Granted ............ 320,000 161,000 120,000
Exercised .......... (60,575) (97,000) (14,800)
Cancelled .......... (19,824) (7,500) (150,409)
-------- -------- --------
At December 31 ..... 571,500 331,899 275,399
======== ======== ========
Options exercisable:
At December 31 ..... 201,500 181,899 174,149
======== ======== ========

Option prices per share:
Granted ............ $5.75-11.88 $3.25-7.38 $3.25-7.38
Exercised .......... 3.00-6.25 3.25-5.63 3.00
Cancelled .......... 3.00-6.13 3.00-6.13 3.00-6.38

In 1992, the Board of Directors and the shareholders adopted the 1992 Senior
Management Stock Option Plan (the "1992 Plan"), a variable stock option plan.
Under the 1992 Plan 800,000 shares were reserved and options for 800,000 shares
were issued and outstanding at December 31, 1993. These options vest over three
years and expire after ten years. The initial exercise prices were $5.625 for
700,000 shares and $3.25 for 100,000 shares, respectively, the market prices on
the dates granted. The exercise prices were adjusted downward on a pro-rata
basis as the trading price of the stock increased above the initial exercise
price so that the exercise price would be $ .01 when the trading price of the
stock was $19.00.

Generally accepted accounting principles ("GAAP") for variable stock option
plans required the Company to record a compensation expense accrual measured by
the difference between the market price of the common stock underlying an option
and the option price as of December 31, 1993. The sharp rise in the price of the
Company's common stock during the fourth quarter of 1993, therefore, required a
charge to earnings.

The Company believed that the application of GAAP could have resulted in large
and repeated future distortion to reported quarterly earnings of the Company,
based on fluctuations in the stock price so long as the 1992 Plan remained in
effect. Therefore, on January 26, 1994, the Board of Directors of the Company
("Board") terminated the 1992 Plan, subject to shareholder approval. In
connection with the termination of the 1992 Plan, the Company recorded an
accrued liability on its balance sheet at December 31, 1993 in the amount of
$4,046,000 and recorded a non-recurring, non-cash charge to earnings. In
addition, in connection with the termination of the 1992 Plan, the Company
granted an aggregate of 449,732 shares of common stock to the holders of the
cancelled options, also subject to shareholder approval. In the second quarter
of 1994, subsequent to the approval by the shareholders, the Company eliminated
the accrued liability of $4,046,000 and increased shareholders' equity by the
same amount for the common stock issued. In 1995, 12,677 of the granted shares
were reacquired by the Company at no cost per the terms of the 1992 Plan.

Also, on January 26, 1994 the Board adopted the 1994 Senior Management Stock
Option Plan (the "1994 Plan"), subject to shareholder approval. Each holder of
options under the 1992 Plan was granted new options with an option exercise
price of $9.00, the trading price of the common stock of the Company at the time
of the Board actions. The shareholders approved the 1994 Plan in June 1994. As
of December 31, 1995, there are outstanding options to purchase 742,592 shares
under the 1994 Plan. During 1995, the shareholders adopted the 1995 Non-Employee
Directors Stock Option

F-17

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

Plan (the "1995 Plan"). The 1995 Plan provides for the automatic granting
annually to each non-employee director options immediately exercisable into
2,000 shares of common stock at the fair market value on the grant date. Options
were granted on July 1, 1995 and will be granted on each January 1 thereafter.
The maximum number of share options under the 1995 Plan is 160,000. As of
December 31, 1995, there were outstanding options to purchase 16,000 shares at
an exercise price of $8.00 per share.

On July 7, 1988, in consideration for entering into a credit agreement, the
Company issued warrants to purchase 785,732 shares of common stock at an
exercise price of $4.50 per share. One half of the warrants issued on July 7,
1988 were repurchased on May 25, 1989 for $400,000. On December 11, 1991, the
Company issued warrants to purchase 25,000 shares of common stock at an exercise
price of $4.375 per share. On November 17, 1993, the Company issued warrants
relating to the 8% Debentures to purchase 150,000 shares of common stock at an
exercise price of $9.50 per share.

NOTE P - Related Party Transactions

The Company has retained the legal services of Shereff, Friedman, Hoffman &
Goodman, LLP in recent years. One of the Company's directors is a partner of
Shereff, Friedman, Hoffman & Goodman, LLP. The total amount of fees paid to
Shereff, Friedman, Hoffman & Goodman, LLP in 1995 and 1994 were approximately
$0.3 million and $0.4 million, respectively, exclusive of the director's fees
paid to Martin Nussbaum, a partner in the firm of Shereff, Friedman, Hoffman &
Goodman, LLP, as compensation for his service as Chairman of the Executive
Committee of the Board of Directors.

The Company has retained the insurance brokerage services of Rollins Hudig Hall
("RHH") in recent years. One of the Company's directors is the President and
Chief Executive Officer of Rollins Real Estate/Investment, a division of RHH.
The total amount of insurance premiums paid to RHH in 1995 and 1994 were
approximately $1.3 million and $1.4 million, respectively.

In 1994, the Company sold its minority interest in Galoob Toys Canada, Inc.,
which continues to act as the Company's distributor in Canada and which
accounted for less than 5% of the Company sales.

NOTE Q - Disclosure About Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:

o Current Assets and Current Liabilities
The carrying value of cash, cash equivalents, accounts receivables,
short-term borrowings, accounts payable and accrued expenses approximate
fair value because of their short maturity.

o Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
quoted market price of the underlining common stock which would be
received upon conversion. At December 31, 1995, the carrying amount and
estimated fair value of long-term debt are $14.0 million and $17.8
million, respectively.

F-18

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE R - Subsequent Events

On February 12, 1996, the Company announced that it was calling for redemption
of its 8% Convertible Subordinated Debentures originally due November 30, 2000
(the "Debentures"), and was commencing an exchange offer for its Depositary
Convertible Exchangeable Preferred Shares (the "Preferred Shares").

Under the terms of the redemption, the $14,000,000 Debentures now outstanding
will be redeemed on or about March 22, 1996, unless converted into the Company's
Common Stock by the holders prior to the redemption date. Until the redemption
date, the Debentures are convertible into an aggregate of 1,511,873 shares of
Common Stock at the rate of $9.26 principal amount for each share of Common
Stock. The Company became entitled to redeem the Debentures when the average
closing price of its Common Stock for twenty consecutive days exceeded 150% of
the conversion price.

Under the terms of the exchange offer, the Company will offer to exchange 1.85
shares of Common Stock for each of the 1,839,500 Preferred Shares currently
outstanding. The exchange offer has an expiration date of March 29, 1996, and is
conditioned on, among other things, the receipt of valid tenders from the
holders of at least 75 percent of the outstanding Preferred Shares. The exchange
offer will expire on March 29, 1996, unless extended by the Company in
accordance with its terms.

F-19

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE S - Segment Information

The Company's operations are in one industry segment: the sale of toys primarily
to major retail outlets. The Company operates in two primary geographic areas,
the U.S. and Europe, and there are no sales between geographic areas.

Information about the Company's operations in different geographic locations are
as follows:

(in thousands)

1995 1994 1993
---- ---- ----
United States
Non-affiliated customer revenue ... $ 139,373 $ 119,702 $ 88,821
Earnings (loss) from operations ... 9,837 6,383 (1,341)
Identifiable assets ............... 111,639 87,653 61,706

Foreign
Non-affiliated customer revenue ... 80,671 59,090 45,513
Earnings (loss) from operations ... 3,152 2,939 (7,874)
Identifiable assets ............... 8,445 13,113 9,299

Consolidated
Net revenues ...................... 220,044 178,792 134,334

Earnings (loss) from operations ... 12,989 9,322 (9,215)
Net proceeds from Nintendo award .. -- 12,124 --
Interest expense .................. (3,429) (2,609) (1,836)
Other income, net ................. 439 365 136
--------- --------- ---------
Earnings (loss) before income taxes 9,999 19,202 (10,915)

Identifiable assets ............... $ 120,084 $ 100,766 $ 71,005

F-20

<PAGE>

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Years ended December 31, 1995, 1994 and 1993

NOTE T - Quarterly Financial Data (Unaudited)

Quarterly financial data for 1995 and 1994 are summarized in the following
table:

(in thousands, except per share amounts)

Net Net Earnings
Net Gross Earnings (Loss) Per
Revenues Margin (Loss) Common Share
-------- ------ ---------- ------------
1995
1st Quarter ........ $33,341 $10,853 $ (4,171) $(0.49)
2nd Quarter ........ 38,219 11,131 (4,087) (0.48)
3rd Quarter ........ 65,518 25,149 6,837 0.58
4th Quarter ........ 82,966 40,850 10,820 0.93

1994
lst Quarter ........ $30,235 $12,673 $ (1,648) $(0.25)
2nd Quarter ........ 33,720 12,601 9,753 0.91
3rd Quarter ........ 50,273 19,937 3,909 0.30
4th Quarter ........ 64,565 28,994 6,410 0.55

F-21

<PAGE>

SCHEDULE II

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)

<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ----------- --------- ---------- ---------- ---------
<S> <C> <C> <C> <C>

YEAR ENDED 12/31/95
- -------------------
Provisions for returns
and allowance $8,097 $12,707 $10,822 $9,982

YEAR ENDED 12/31/94
- -------------------
Provisions for returns
and allowance 5,249 11,979 9,131 8,097

YEAR ENDED 12/31/93
- -------------------
Provisions for returns
and allowance 6,031 5,516 6,298 5,249

</TABLE>

See Note B of Notes to Consolidated Financial Statements.

S-1

<PAGE>

SCHEDULE X

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

SUPPLEMENTARY INCOME STATEMENT INFORMATION
(in thousands)

Items 1995 1994 1993
- ----- ---- ---- ----

Maintenance and repairs * * *
Depreciation and amortization of
intangible assets, pre-operating
costs and similar deferrals * * *
Taxes, other than payroll and
income taxes * * *
Royalties $ 16,326 $ 13,498 $ 11,337
Advertising and promotion 31,240 30,616 23,537

* Less than 1% of total sales.

S-2

<PAGE>

================================================================================
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.

TABLE OF CONTENTS

Page

Prospectus Summary...........................................2
Risk Factors ................................................7
Use of Proceeds.............................................11
Dividends ..................................................11
Price Range of Common Stock.................................12
Capitalization..............................................13
Selected Consolidated Financial Data........................14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................................15
Business....................................................21
Management..................................................29
Executive Compensation......................................34
Principal Stockholders......................................40
Selling Stockholders........................................43
Plan of Distribution........................................45
Certain Transactions........................................46
Description of Capital Stock................................46
Legal Matters...............................................53
Experts.....................................................53
Available Information.......................................53
Index to Financial Statements..............................F-1

1,684,398 SHARES OF COMMON STOCK

LEWIS GALOOB TOYS, INC.

--------------

PROSPECTUS

--------------

_______________, 1996

==============================================================================

<PAGE>

PART II

INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.

The following table sets forth the estimated costs and expenses in
connection with the issuance and distribution of the securities being
registered, other than underwriting commissions and discounts:

SEC registration fee ........................................... $ 7,799.25
Accounting fees and expenses* .................................. $ 2,500.00
Legal fees and expenses* ....................................... $20,000.00
Printing costs* ................................................ $ 5,000.00
Miscellaneous* ................................................. $ 4,700.75
----------
Total .......................................................... $40,000.00
===========

- -------------
* Estimated

The Company will pay all expenses of the Company and the Selling
Stockholders relating to this Offering.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.

The indemnification of officers and directors of the Company is
governed by Section 145 of the General Corporation Law of the State of Delaware
(the "DGCL") and the Certificate of Incorporation and By-Laws of the Company.
Among other things, the DGCL permits indemnification of a director, officer,
employee or agent in civil, criminal, administrative or investigative actions,
suits or proceedings (other than an action by or in the right of the
corporation) to which such person is a party or is threatened to be made a party
by reason of the fact of such relationship with the corporation or the fact that
such person is or was serving in a similar capacity with another entity at the
request of the corporation against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, if he had no reasonable cause to
believe his conduct was unlawful. No indemnification may be made in any such
suit to any person adjudged to be liable to the corporation unless and only to
the extent that the Delaware Court of Chancery or the court in which the action
was brought determines that, despite the adjudication of liability, such person
is under all circumstances, fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper. Under the DGCL, to the extent that
a director, officer, employee or agent is successful, on the merits or
otherwise, in the defense of any action, suit or proceeding or any claim, issue
or matter therein (whether or not the suit is brought by or in the right of the
corporation), he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him. In all cases in which
indemnification is permitted (unless ordered by a court), it may be made by the
corporation only as authorized in the specific case upon a determination that
the applicable standard of conduct has been met by the party to be indemnified.
The determination must be made by a majority vote of a quorum consisting of the
directors who were not parties to the action or, if such a quorum is not
obtainable, or even if obtainable, if a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or by the
stockholders. The statute authorizes the corporation to pay expenses incurred by
an officer or director in advance of a final disposition of a proceeding upon
receipt of an undertaking by or on behalf of the person to whom the advance will
be made, to repay the advances if it shall ultimately be determined that he was
not entitled to indemnification. The DGCL provides that indemnification and
advances of expenses permitted thereunder are not to be exclusive of any rights
to which those seeking indemnification or advancement of expenses may be
entitled under any By-Law, agreement, vote of stockholders or disinterested
directors, or otherwise. The DGCL also authorizes the Company to purchase and
maintain liability insurance on behalf of its directors, officers,

II-1

<PAGE>

employees and agents regardless of whether the Company would have the statutory
power to indemnify such persons against the liabilities insured.

The Certificate of Incorporation of the Company (the "Certificate")
provides that no director of the Company shall be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) for paying a dividend or approving a stock repurchase in violation of
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.

The Certificate also provides that directors, officers, employees and
others shall be indemnified to the fullest extent authorized by the DGCL, as in
effect (or, to the extent indemnification is broadened, as it may be amended),
against any and all expense, liability and loss (including attorneys' fees,
judgments, penalties, fines, ERISA excise taxes and judgments, fines and amounts
paid or to be paid in settlement) from threatened, pending or completed actions,
suits or proceedings, whether civil, criminal, administrative or investigative.
The Certificate further provides that, to the extent permitted by the DGCL,
expenses so incurred by any such person in defending an action, suit or
proceeding shall, at his request, be paid by the Company in advance of the final
disposition of such action or proceeding.

The Certificate provides that the right to indemnification and the
payment of expenses incurred in defending a proceeding in advance of its final
disposition shall not be exclusive of any other right which any person may have
or acquire under any statute, provision of the Certificate or By-Laws of the
Company, agreement, vote of stockholder or disinterested directors, or
otherwise.

The Company has obtained directors' and officers' liability and
company reimbursement insurance which, among other things (i) provides for
payment on behalf of its officers and directors against loss as defined in the
policy stemming from acts committed by directors and officers in their capacity
as such and (ii) provides for payment on behalf of the Company against such loss
but only when the Company shall be required or permitted to indemnify directors
or officers for such loss pursuant to statutory or common law or pursuant to
duly effective Certificate or By-Law provisions.

Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.

In a November 1993 private placement, the Company raised $14,000,000
through the sale of its 8% Convertible Subordinated Debentures due 2000 (the
"Debentures"). The Debentures mature on November 30, 2000 and are convertible
into 1,511,871 shares of common stock of the Company ("Common Stock") based on
the current $9.26 conversion price. In connection with the sale of the
Debentures, the Company paid a commission to its investment banker of $560,000
and issued it warrants to purchase 150,000 shares of Common Stock, at an
exercise price of $9.50 per share. The issuance of the above securities was
deemed to be exempt from registration under the Act, in reliance on Section 4(2)
thereof or Regulation D promulgated thereunder, as transactions by an issuer not
involving any public offering.

On February 28, 1996, the Company commenced an exchange offer for its
Depositary Convertible Exchangeable Preferred Shares (the "Preferred Shares"),
offering to exchange 1.85 shares of

II-2

<PAGE>

Common Stock for each outstanding Preferred Share. The exchange offer has an
expiration date of March 29, 1996 and is conditioned on, among other things, the
receipt of valid tenders from the holders of at least 75% of the outstanding
Preferred Shares. The issuance of the above securities will be deemed to be
exempt from registration under the Act, in reliance of Section 3(a)(9)
thereunder.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a) The following exhibits are filed as part of the Registration Statement:

2.1(1) Agreement of Merger, dated as of July 6, 1987.
3.1(1) Certificate of Incorporation.
3.2(1) Bylaws.
4.1(2) Form of Certificate for Shares of Common Stock of Registrant.
4.4(a)(3) Warrant Agreement, dated as of July 7, 1988, between the
Registrant and Wells Fargo Bank and warrants issued to Wells
Fargo Bank.
4.4(b)(4) Warrant Agreement, dated as of December 11, 1991, by and
between the Registrant and Shereff, Friedman, Hoffman and
Goodman, LLP.
4.4(c)(4) Warrant Agreement, dated as of November 17, 1993, by and
between the Registrant and Gerard Klauer Mattison & Co., Inc.
4.5(a)(5) Form of Certificate of Designations of the Registrant's $17.00
Convertible Exchangeable Preferred Stock.
4.5(b)(6) Form of Certificate of Designations of the Registrant's Series
A Preferred Stock.
4.6(5) Form of Indenture with respect to the Registrant's 8 1/2%
Convertible Subordinated Debentures due October 1, 2014,
between the Registrant and Manufacturers Hanover Trust Company
as Trustee, including form of Convertible Debenture.
4.7(5) Form of Indenture with respect to the Registrant's
Subordinated Debentures due October 1, 2014, between the
Registrant and Manufacturers Hanover Trust Company as Trustee,
including form of Debenture.
4.8(5) Form of Indenture with respect to the Registrant's 8 1/2%
Senior Subordinated Notes, between the Registrant and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Note.
4.9(5) Form of Deposit Agreement between the Registrant and
Manufacturers Hanover Trust Company of California as
Depositary, including form of Depositary Receipt.
4.10(6) Form of Rights Agreement, dated as of January 17, 1990,
between the Registrant and Mellon Securities Trust Company.
4.11(4) Indenture, with respect to the Registrant's 8% Convertible
Subordinated Debentures due year 2000, between the Company and
Continental Stock Transfer & Trust Company, as Trustee,
including form of Debenture Note.
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
10.1(a)(7)* Amended and Restated 1984 Employee Stock Option Plan.
10.1(b)(8)* 1994 Senior Management Stock Option Plan.
10.1(c)(9)* Form of Agreement between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Registrant.
10.1(d)(10)* Form of Amendment No. 1 between each of Mark Goldman, William
Catron, Lou Novak, Gary Niles, Mark Shepherd, Ronald
Hirschfeld and H. Alan Gaudie and the Registrant.
10.1(e)(11) 1995 Non-Employee Directors' Stock Option Plan.
10.2(11)* Lewis Galoob Toys, Inc. Savings and Retirement Plan (Formerly
the Lewis Galoob Toys, Inc. Profit Sharing) (Amendment and
Restatement effective January 1, 1987).
10.4(10)* Severance Agreement, dated October 27, 1994, between Mark
Goldman and the Registrant.
10.5(12)* Agreement, dated as of December 11, 1991, by and between
Martin Nussbaum and the Registrant.
10.6(a)(13)* Agreement, dated July 15, 1995, between William G. Catron and
the Registrant.
10.6(b)(13)* Agreement, dated July 15, 1995, between Loren Hildebrand and
the Registrant.
10.6(c)(13)* Agreement, dated July 15, 1995, between Ronald Hirschfeld and
the Registrant.
10.6(d)(13)* Agreement, dated July 15, 1995, between Gary J. Niles and the
Registrant.
10.6(e)(13)* Agreement, dated July 15, 1995, between Louis R. Novak and the
Registrant.
10.6(f)(13)* Agreement, dated July 15, 1995, between William B. Towne and
the Registrant.

II-3

<PAGE>

10.7(a)(4) Securities Purchase Agreement, dated November 17, 1993, by and
among the Registrant and the purchasers thereto (the
"Purchasers").
10.7(b)(4) Registration Rights Agreement, dated as of November 17, 1993,
by and among the Registrant and the Purchasers.
10.7(c)(4) Loan and Security Agreement, dated as of April 1, 1993, by and
among the Registrant and Congress Financial Corporation
(Central), including form of Revolving Loan Note.
10.7(d)(4) First Amendment to Loan and Security Agreement, dated as of
November 17, 1993.
10.7(e)(10) Amended and Restated Loan and Security Agreement, dated as of
March 31, 1995, by and among the Registrant and Congress
Financial Corporation (Central).
10.9(a)(14) License Agreement, dated June 16, 1986, by and between
Funmaker, as Licensor and the Registrant, as Licensee.
10.9(b)(15) License Agreement, dated May 4, 1990, by and among the
Registrant as Licensee, Codemasters Software Company, Ltd. and
Camerica Corporation, Limited.
10.9(c)(15) Amendment No. 1 dated June 1991 to License Agreement dated May
4, 1990.
10.9(d)(15) Amendment No. 2 dated December 23, 1991 to License Agreement,
dated May 4, 1990.
10.9(e)(15) European License Agreement, dated December 23, 1991, by and
between Codemasters Software Company, Ltd. and the Registrant.
10.9(f)(15) Third Amendment to United States License and First Amendment
to European License, dated November 4, 1992.
10.9(g)(10) Fourth Amendment to United States License Agreement, dated
October 14, 1994.
10.10(14) Agreement of Purchase and Sale, dated October 22, 1986, by and
between ATC Building Company, as Seller, and the Registrant,
as Buyer.
10.12(a)(1) Lease Agreement, dated March 12, 1987, by and between Lincoln
Alvarado and Patrician Associates, Inc., as Lessor, and the
Registrant, as Lessee.
10.12(b)(12) Amendment No. 1 to Lease Agreement.
10.12(c)(11) Lease Agreement, dated December 1, 1995, by and between 200
Fifth Avenue Associates, as Lessor, and the Registrant, as
Lessee.
11 Statement of Computation of Per Share Earnings.
12 Statement of Computation of Ratio of Earnings to Fixed Charges
and Preferred Stock Dividends.
21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP (included
in its opinion which appears as Exhibit 5.1).
24(13) Power of Attorney.

- --------------------
(1) Incorporated by reference to the Registrant's Amendment No. 1 to
Registration Statement on Form 8-B, filed with the Securities and
Exchange Commission (the "Commission") on January 11, 1988.
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-3, filed with the Commission on February 26, 1990.
(3) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1987, filed with the Commission on August 2,
1988.
(4) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1993, filed with the Commission on March 31,
1994.
(5) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A, filed with the Commission on October 6, 1989.
(6) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A, filed with the Commission on January 23, 1990.
(7) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 33-56585, filed with the Commission on
November 23, 1994.
(8) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 33-56587, filed with the Commission on
November 23, 1994.
(9) Incorporated by reference to the Registrant's Registration Statement on
Form S-8, Registration No. 33-56589, filed with the Commission on
November 23, 1994.
(10) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1994, filed with the Commission on March 31,
1995.

II-4

<PAGE>

(11) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1995, filed with the Commission on March 11,
1996.
(12) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1991, filed with the Commission on March 30,
1992.
(13) Incorporated by reference to the Registrant's Registration Statement on
Form S-1, Registration No. 333-00743, filed with the Commission on
February 6, 1996.
(14) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1986, filed with the Commission on March 31,
1987.
(15) Incorporated by reference to the Registrant's Form 10-K for the fiscal
year ended December 31, 1992, filed with the Commission on March 31,
1993.
* Indicates exhibits relating to executive compensation.

(b) Financial Statements Schedules

Schedule VIII - Valuation and Qualifying Accounts and Reserves for the
years ended December 31, 1995, 1994 and 1993.

Schedule X - Supplementary Income Statement Information for the years
ended December 31, 1995, 1994 and 1993.

All other schedules are omitted because they are not applicable or the
required information is shown in the Company's consolidated financial statements
or the notes thereto.

ITEM 17. UNDERTAKINGS.

The Registrant hereby undertakes:

(1) That, for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in reliance
upon Rule 430A under the Act and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective;

(2) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:

(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;

(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or the aggregate, represent a fundamental change
in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume and price
represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;

(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement.

Provided, however, that paragraphs (2)(i) and (2)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
registrant pursuant to the section 13 or section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.

(3) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the

II-5

<PAGE>

securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.

(4) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.

II-6

<PAGE>

SIGNATURES

Pursuant to the requirements of the Act, the Registrant has duly
caused this Amendment No. 1 to Registration Statement on Form S-1 to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
South San Francisco, State of California, on the 12th day of March, 1996.

LEWIS GALOOB TOYS, INC.

By: /s/ Mark D. Goldman
--------------------------------------
Mark D. Goldman
President and Chief Executive Officer

Pursuant to the requirements of the Act, this Amendment No. 1 to
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLES DATE
- --------- ------ ----
<S> <C> <C>
/s/ Mark D. Goldman President, Chief Executive March 12, 1996
- --------------------------- Officer and Director
Mark D. Goldman

/s/ William B. Towne Executive Vice President, March 12, 1996
- --------------------------- Finance and Chief Financial Officer
William B. Towne

* Director March 12, 1996
- ---------------------------
Andrew Cavanaugh

* Director March 12, 1996
- ---------------------------
Paul A. Gliebe, Jr.

* Director March 12, 1996
- ---------------------------
Scott R. Heldfond

* Director March 12, 1996
- ---------------------------
Hoffer Kaback

* Director March 12, 1996
- ---------------------------
S. Lee Kling

* Director March 12, 1996
- ---------------------------
Roger Kowalsky

* Director March 12, 1996
- ----------------------------
Martin Nussbaum

* Director March 12, 1996
- ----------------------------
George Riordan

*By:/s/ Mark D. Goldman
-------------------------
Mark D. Goldman
Attorney-in-Fact
</TABLE>

<PAGE>

INDEX TO EXHIBITS

Exhibit No. Exhibit
- ----------- -------
5.1 Opinion of Shereff, Friedman, Hoffman & Goodman, LLP.
11 Statement of Computation of Per Share Earnings.
12 Statement of Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends.
21 Subsidiaries of the Registrant.
23.1 Consent of Price Waterhouse LLP.
23.2 Consent of Shereff, Friedman, Hoffman & Goodman, LLP
(included in its opinion which appears as Exhibit 5.1).

March 13, 1996

Lewis Galoob Toys, Inc.
500 Forbes Boulevard
South San Francisco, California 94080

Dear Sirs:

Lewis Galoob Toys, Inc., a Delaware corporation (the
"Company"), intends to transmit for filing with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933, as
amended, on Form S-1 (the "Registration Statement") which relates to 1,684,298
shares (the "Shares") of the Company's common stock, par value $.01 per share
(the "Common Stock"), which are being offered for resale by certain selling
stockholders (i) upon conversion of warrants issued to Gerard Klauer Mattison &
Co., LLC (the "GKM Warrant"), (ii) upon conversion of warrants issued to this
firm (the "SFH&G Warrant") (which warrant was subsequently distributed to
certain members of this firm) or (iii) upon exercise of the Company's 8%
Convertible Subordinated Debentures due 2000 (the "Debentures"), and the
related Preferred Stock Purchase Rights (the "Rights") to be issued in
connection with the issuance of the Shares pursuant to the Rights Agreement by
and between the Company and Continental Stock Transfer & Trust Company, as
substitute Rights Agent (the "Rights Agreement"). This opinion is an exhibit to
the Registration Statement.

We have acted as counsel to the Company in connection with
the proposed offer and sale of the Shares and related Rights as contemplated by
the Registration Statement. However, we are not general counsel to the Company
and would not ordinarily be familiar with or aware of matters relating to the
Company unless they are brought to our attention by representatives of the
Company. We note further that Martin Nussbaum, a member of this firm, has been
a director of the Company since 1985 and is the beneficial owner of 9,473
shares of Common Stock, including 2,473 shares of Common Stock issuable upon
exercise of that portion of the SFH&G Warrant distributed to him. Mr. Nussbaum
disclaims beneficial ownership of 22,527 shares of Common Stock issuable upon
exercise of the remaining portion of the SFH&G Warrant distributed to other
members of this firm. The SFH&G Warrant was issued to this firm by the Company
in connection with Mr. Nussbaum's services as Chairman of the Executive
Committee of the Board of Directors.

<PAGE>

Lewis Galoob Toys, Inc.
March 13, 1996
Page 2

We have examined copies (in each case signed, certified or
otherwise proved to our satisfaction) of the Company's Certificate of
Incorporation, its By-Laws as presently in effect, minutes and other
instruments evidencing actions taken by its directors and stockholders, and
such other documents and instruments relating to the Company and the proposed
offering as we have deemed necessary under the circumstances. In our
examination of all such agreements, documents, certificates and instruments, we
have assumed the genuineness of all signatures and the authenticity of all
agreements, documents, certificates and instruments submitted to us as
originals and the conformity with the originals of all agreements, instruments,
documents and certificates submitted to us as copies. Insofar as this opinion
relates to securities to be issued in the future, we have assumed that all
applicable laws, rules and regulations in effect at the time of such issuance
are the same as such laws, rules and regulations in effect as of the date
hereof.

We note that we are members of the Bar of the State of New
York and do not hold ourselves out as experts in or opine on the laws of any
jurisdiction other than the State of New York and the federal laws of the
United States. Insofar as the opinions set forth below relate to the laws of
the State of Delaware, we have relied solely upon our reading of standard
compilations of the Delaware General Corporation Law, as presently in effect.

Based on the foregoing, and subject to and in reliance on the
accuracy and completeness of the information relevant thereto provided to us,
it is our opinion that:

1. The Company has been duly incorporated under the
laws of the State of Delaware and has an authorized
capital stock consisting of 50,000,000 shares of
common stock, par value $.01 per share, and
1,000,000 shares of preferred stock, par value $1.00
per share.

2. The Shares underlying the Debentures have been duly
authorized and, when paid for and issued upon
conversion of such Debentures, in accordance with
the Indenture (the "Indenture") by and between the
Company and Continental Stock Transfer & Trust
Company, as Trustee, will be legally and validly
issued, fully paid and non-assessable.

3. The Shares underlying the GKM Warrant have been duly
authorized and, when paid for and issued upon
exercise of such GKM Warrant, in accordance with the
Warrant Agreement (the "GKM Warrant Agreement") by
and between the Company and Gerard Klauer Mattison &
Co., LLC, will be legally and validly issued, fully
paid and non-assessable.

<PAGE>

Lewis Galoob Toys, Inc.
March 13, 1996
Page 3

4. The Shares underlying the SFH&G Warrant have been
duly authorized and, when paid for and issued upon
exercise of such SFH&G Warrant, in accordance with
the Warrant Agreement (the "SFH&G Warrant
Agreement") by and between the Company and this
firm, will be legally and validly issued, fully paid
and non-assessable.

5. The Rights issued in connection with the issuance of
the Shares underlying the Debentures pursuant to the
Rights Agreement have been duly authorized and, when
paid for and issued upon conversion of such
Debentures, in accordance with the Indenture, will
be legally and validly issued.

6. The Rights issued in connection with the issuance of
the Shares underlying the GKM Warrant pursuant to
the Rights Agreement have been duly authorized and,
when paid for and issued upon exercise of such GKM
Warrant in accordance with the GKM Warrant
Agreement, will be legally and validly issued.

7. The Rights issued in connection with the issuance of
the Shares underlying the SFH&G Warrant pursuant to
the Rights Agreement have been duly authorized and,
when paid for and issued upon exercise of such SFH&G
Warrant in accordance with the SFH&G Warrant
Agreement, will be legally and validly issued.

We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement and as an exhibit to any filing made by the
Company under the securities or "Blue Sky" laws of any state.

This opinion is rendered as of the date hereof and we
undertake no obligation to advise you of any change in any matters herein,
whether legal or factual. This opinion is

<PAGE>

Lewis Galoob Toys, Inc.
March 13, 1996
Page 4

furnished to you in connection with the filing of the Registration Statement,
and is not to be used, circulated, quoted or otherwise relied upon by any other
person or for any other purposes without our prior written consent, except as
expressly provided in the preceding paragraph.

Very truly yours,

SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP

EXHIBIT 11

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

COMPUTATION OF EARNINGS PER SHARE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
PRIMARY EARNINGS:
- ----------------
Net earnings (loss) applicable to
common shares ($000) $ 6,272 $25,297 $(14,051)
======= ======= ========

Average shares of common stock
outstanding during the period 10,071,304 9,852,673 9,548,422

Add: Incremental shares from assumed
exercise of stock options and warrants 380,146 258,439 --
-------- -------- ----------

10,451,450 10,111,112 9,548,422
========== ========== ==========

Net earnings (loss) per common
share -- primary $ 0.60 $ 1.51 $ (1.47)
======= ======= ========

FULLY DILUTED EARNINGS:
- ----------------------
Net earnings (loss) applicable to
common shares ($000) $ 6,272 $15,297 $(14,051)

Add: Preferred stock dividends:
Paid ($000) -- -- --
In arrears ($000) 3,127 3,127 3,127
Add: Interest on Debentures ($000) 1,030 1,072 137
------- ------- --------
$10,429 $19,496 $(10,787)
======= ======= ========

Average shares of common stock
outstanding during the period 10,071,304 9,852,673 9,548,422

Add: Incremental shares from assumed
exercise of stock options and warrants 444,409 261,458 236,825

Add: Shares issuable upon assumed
conversion of Preferred Stock 2,180,148 2,180,148 2,180,148

Add: Shares issuable upon assumed
conversion of 8% Convertible
Subordinated Debentures, weighted 1,511,879 1,511,879 186,396
---------- ---------- ----------
14,207,740 13,806,158 12,151,791
========== ========== ==========

Net earnings (loss) per common
share -- Fully diluted $ (A) $ 1.41 (A)
======= ======= ========
</TABLE>
- ---------------
(A) Anti dilutive, therefore fully diluted earnings per share is same as
primary earnings per share, $0.60 and $(1.47) for 1995 and 1993,
respectively.

EXHIBIT 12

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
(in thousands, except ratios)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net earnings (loss) $ 9,399 $18,424 $(10,924) $(2,447) $(7,540)
Income tax 600 778 9 238 --
------- ------- -------- ------- -------
Charge (credit) 9,999 19,202 (10,915) (2,209) (7,540)

Fixed charges:
Interest expense 3,429 2,609 1,836 1,550 1,775
Portion of rental
expense 663 505 483 613 728
------- ------- -------- ------- -------
Total fixed charges 4,092 3,114 2,319 2,163 2,503
------- ------- -------- ------- -------

Earnings (loss) before
income taxes and
fixed charges $14,091 $22,316 $ (8,596) $ (46) $(5,037)
======= ======= ======== ======= =======

Preferred dividends
requirements $ 3,127(B) $ 3,127(B) $ 3,127(B) $ 3,127 $ 3,127
Ratio of pretax income
to net income 1.06 1.04 1.00 1.00 1.00
------- ------- -------- ------- -------
Preferred dividends
factored 3,315 3,252 3,127 3,127 3,127

Total fixed charges 4,092 3,114 2,319 2,163 2,503
------- ------- -------- -------- -------
Total fixed charges and
preferred dividends $ 7,407 $ 6,366 $ 5,446 $ 5,290 $ 5,630
======= ======= ======== ======= =======

Ratio of earnings to
fixed charges and
preferred dividends 1.90 3.51 (A) (A) (A)
======= ======= ======= ======== =======

</TABLE>
- ---------------
(A) Earnings are inadequate to cover fixed charges and preferred dividends in
1993, 1992, and 1991.

(B) Includes Preferred Stock dividends in arrears.

EXHIBIT 21

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

SUBSIDIARIES OF THE REGISTRANT

Galco International Toys, N.V., an Aruba corporation

EXHIBIT 23.1

LEWIS GALOOB TOYS, INC. AND SUBSIDIARIES

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated February 8, 1996,
except as to Note R, which is as of February 12, 1996, relating to the
financial statements of Lewis Galoob Toys, Inc., which appears in such
Prospectus. We also consent to the application of such report to the Financial
Statement Schedule for the three years ended December 31, 1995 listed under Item
16(b) of this Registration Statement when such schedule is read in conjunction
with the financial statements referred to in our report. The audits referred to
in our report also included this schedule. We also consent to the reference of
us under the heading "Experts" in such Prospectus.

/s/ PRICE WATERHOUSE LLP
San Francisco, California
March 13, 1996